NY regulator calls for moratorium on "shadow insurance" practice
New York's top financial
regulator has called for a national moratorium on certain transactions by life insurance companies that
potentially put policyholders and taxpayers at greater risk, according to a
regulatory report.
The New York State
Department of Financial Services (DFS) said in a report published late on Tuesday that insurance companies use a method known as
"shadow insurance" to shift blocks of insurance policy claims to
shell companies — often in states outside where the companies are based, or
else offshore — to take advantage of looser reserve and regulatory requirements.
Such transactions aim to help an insurance company divert the reserves that it had
previously set aside to pay policyholders to other purposes, the DFS said.
However, the regulator said such transactions do
not actually transfer the risk for those insurance policies as the parent company would still be liable for paying claims if the shell
company's weaker reserves are exhausted.
"Shadow insurance is
reminiscent of certain practices used in the run up to the financial crisis, such as issuing securities
backed by subprime mortgages through structured investment vehicles and writing credit default swaps
on higher-risk
mortgage-backed securities," the regulator said in the report.
As part of its investigation, the
regulator said
it found that New York-based insurance companies and their affiliates engaged
"in at least $48 billion of shadow insurance transactions to lower their
reserve and regulatory requirements."
To check this practice, the DFS said it will seek disclosure of
shadow insurance transactions by New York-based insurers and their affiliates.
Also, the regulator asked State insurance commissioners to consider an immediate
national moratorium on approving additional shadow insurance transactions.
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