New York insurance regulators are calling for a broad state and federal probe of use of captives by life insurers as a means of lowering their reserve and regulatory requirements.
"The Federal Insurance Office, the Office of Financial Research, the National Association of Insurance Commissioners, and other state insurance commissioners should conduct investigations similar to DFS's to document a more complete picture of the full extent of shadow insurance written nationwide," Benjamin Lawsky, superintendent of the New York Department of Financial Services, said.
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He made his comments following release of a report today showing that New York-based insurance companies and their affiliates engaged in at least $48 billion of shadow insurance transactions.
But, he said, "This is just the tip of the iceberg. There are billions of dollars in additional shadow insurance risk on the books of other companies that hasn't been disclosed."
He said other state regulators and federal officials should move quickly to conduct similar investigations so that the public has a more complete picture of the shadow "that this questionable practice casts over the insurance industry."
Lawsky explained that, as part of its investigation, New York DFS required all life insurers based in New York to provide information on shadow insurance transactions.
However, he said, the findings of this investigation and DFS's authority under Section 308 are limited to New York-based life insurers.
As such, "the $48 billion in shadow insurance transactions that DFS's investigation uncovered are likely just a fraction of the total shadow insurance outstanding nationwide. There are almost certainly tens, if not hundreds, of billions of dollars of additional shadow insurance on the books of insurance companies across the country.
Lawsky said the probe found that New York insurers were making inconsistent, spotty and incomplete disclosures, and diverting reserves as a means of showing "artificially rosy" capital buffers.
He said the report found weak transparency and regulatory blind spots.
"Most states have laws that provide for strict confidentiality on financial information related to shadow insurance," Lawsky said.
"These confidentiality requirements prevent regulators from outside that state from having a full window into the risks that those transactions create," he said.
"Indeed, the current lack of transparency surrounding shadow insurance is what, in great part, drove DFS to undertake this investigation," he said.
