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 spot on, they don't add up to a fair representation of the captive industry, he says.

David Provost, deputy commissioner, captive insurance, with the Banking, Insurance Securities and Health Care Administration in Vermont, who is quoted in the May 9 article, says he plans to respond with a letter to the editor of The New York Times. “Captives are 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].”

The Times article 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 dollar amount 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 notes 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. And just as in any reinsurance transaction, MetLife is still on the hook, regardless of whether Deutsche Bank is still there at the time.”

The Times article mostly takes issue with insurance companies setting up captive subsidiaries. The article suggests that insurers may use this strategy to skirt insurance regulations and free up money locked in as reserves.

The article also deploys some provocative language, noting that captive laws in U.S. states allow “Bermuda-style financial wizardry right in a policyholder's own backyard.”

An NU investigation revealed that the Times itself owns a New York-domiciled captive named Midtown Insurance Co.

Special Reports /

Vt. Captive Regulator Hits Back At NY Times Report

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