NU Online News Service, May 9, 3:22 p.m. EDT
An article in The New York Times comparing captive insurance to “the shadow banking system” has Vermont’s captive regulator puzzled and frustrated, because while some of the observations are true, they don’t add up to a fair representation of the captive industry, he says.
David Provost, deputy commissioner, captive insurance, Banking, Insurance Securities and Health Care Administration in Vermont, who is quoted in the article, says he plans to respond with a letter to the editor of The New York Times. “It’s not the sort of thing we can explain in two lines,” he notes, adding that he hesitates to “keep a story going that isn’t a story.”
The quick answer, he says, is “the policyholder is protected, which is the key and is the only way I would do [captives].”
Captive insurance is a regulated form of self-insurance that has been in use since the 1960s, and has been a part of the Vermont insurance industry since 1981, when Vermont passed the Special Insurer Act. About 30 states have captive regulations in place.
Captives are formed by companies or groups of companies as a form of alternative insurance to better manage their own risk. They are typically used for corporate lines of insurance such as property, general liability, products liability, or professional liability, according to Vermont.
Provost points out that the policyholder is not more at risk with a captive, as stated in the article, but rather less at risk “because we’ve spread the risk.”
The Times article, written by Mary Williams Walsh and Louise Story, also focuses on life insurance, which Provost says is much different than property and casualty.
With life insurance, he says, the variables are different—based on economics and actuarial studies more than on regulation.
Property and casualty, on the other hand, “is a completely different animal. You don’t know when, you don’t know how much, you don’t know what cause.” In either case, however, the captive has the assets to cover any losses, he says.
According to the Times article, the cost of some deals involving captives “has been considerable. In 2008, MetLife used a subsidiary in Vermont to handle a crucial $3.5 billion letter of credit, with help from Deutsche Bank, because the subsidiary was not subject to the same collateral requirements as in New York.”
Provost comments, “Again the language details are somewhat mixed up, because the insurance company in New York has to have certain reserves. If they cede those to a Vermont captive, they still have to have something to back up those reserves and it still winds up being consolidated in the end.”
He adds, “It’s not a hidden transaction. The captive is consolidated into the parent, so that the reserves are still on MetLife’s books.”
He notes, however, that because accounting rules are different in captives and letters of credit are permitted as assets, “that’s what the transaction is keyed upon.”
Provost observes that while this is the point the Times is picking at, “I don’t think it needs to be picked at. You’ve now transferred the risk to Deutsche Bank and clearly, at the pricing they’re offering—at one-tenth of a percent per year—they’re pretty confident they’re not going to have to pay up.”
But should the losses materialize, he adds, “they’re there to back up MetLife. Just as in any reinsurance transaction, MetLife is still on the hook, regardless of whether Deutsche Bank is still there at the time.”
Provost observes that about 30 states are set up as captive domiciles. “The fact is, 30 states now do this and eventually more states will allow it, and I don’t see anything nefarious going on.”
A captive, he says, helps the parent company to be able to manage a block of business. “They carve it out and set it aside, but it’s still consolidated into the parent. It’s not like it disappears and goes away.”
He says the article mentions captives can keep costs down for consumers, but then “tags on, ‘just the way pooled mortgages did.’ There is no comparison at all to the two.”