Lawsky Call on Captive Insurers Questioned by NAIC

Jim Donelon, the president of the National Association of Insurance Commissioners, questioned the need for a countrywide halt on approvals of captive insurance deals one day after New York’s regulator said the transactions hide risk.

“Frankly, at this point in time, I don’t see an obvious need for such a moratorium,” Donelon said today on a conference call held by the NAIC.

MetLife Inc. (MET) and Prudential Financial Inc. (PRU), the largest U.S. life insurers, are among companies that use subsidiaries known as captives to transfer risk and increase financial flexibility. Benjamin Lawsky, the superintendent of New York’s Department of Financial Services, said in a report yesterday that other states are allowing captives to use riskier collateral in a “regulatory race to the bottom.”

“The fact that certain insurers are inappropriately using shell games to hide risk and loosen reserve requirements is greatly troubling,” Lawsky said in the report. “Shadow insurance allows companies to divert reserves for other purposes besides paying policyholder claims.”

Donelon said NAIC members already have a group reviewing captives and that state regulators support improved transparency on the deals.

“We are doing what we need to do in a thoughtful, deliberative way,” Donelon said on the call. He said that the NAIC weighs standards rather than imposing regulations and that “one of those standards could be to implement what I consider a knee-jerk position of issuance of moratorium before the house is on fire.”

To contact the reporters on this story: Zachary Tracer in New York at ztracer1@bloomberg.net; Megan Hickey in New York at mhickey18@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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