Is Insurance Becoming Less”Sure?”

The New York Times reported this morning on a very disturbing trend. It seems various states are relaxing their laws which require insurance companies to maintain adequate reserves to pay claims, and to keep their finances transparent to the public. Why in the world would state governments do such a thing? Well, it seems there is money to be made in the form of taxing these insurance entitles…a lot of money. So,”shady” business that was mainly being conducted offshore in countries like Bermuda or the Cayman Islands, is now permissible in states like Vermont, Utah, South Carolina, Delaware and Hawaii. Those states are “aggressively remaking themselves as destinations of choice for the kind of complex private insurance transactions once done almost exclusively offshore. Roughly 30 states have passed some type of law to allow companies to set up special insurance subsidiaries called captives, which can conduct Bermuda-style financial wizardry right in a policyholder’s own backyard.”

Aetna, MetLife, the Hartford Financial Services Group, Swiss Reinsurance, Genworth Financial and the American International Group (A.I.G.), among others, taken advantage of these laws and the concept of”captives” in order to refinance life, disability and long-term-care insurance policies.

One of the major concerns of these financial maneuverings is that is that some states are offering a more lenient, and less protective scheme of laws than other states and thus lure companies away from the protective states. This game may allow insurance companies to escape some of the consumer protective rules that have been put in place over the course of many years, all to the detriment of insurance consumers.

Fortunately, our California Insurance Commissioner, Dave Jones, is taking a cautious and sensible approach to all of this as can be seen from his comments. Mr. Jones remarks “we need to ensure that innovative transactions are not a strategy to drain value away from policyholders only to provide short-term enrichment to shareholders and investment bankers.”

Read the original article. It’s a bit scary. http://www.nytimes.com/2011/05/09/business/economy/09insure.html?pagewanted=1&_r=1&nl=todaysheadlines&emc=tha2

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