A new report from the New York State Department of Financial Services (DFS) has revealed that New York-based insurers are being held accountable for at least $48 billion in hidden ‘shadow insurance’ transactions through captive and reinsurance entities.
Shadow insurance is a loophole that puts policyholders and taxpayers at greater risk by allowing insurers to make their balance sheets appear artificially healthy and divert policyholder reserves to other purposes, according to the department of financial services.
Reserves are funds that insurers set aside to pay policyholder claims.
According to New York's governor Andrew Cuomo, shadow insurance undermines transparency and accountability in the financial and insurance industries, which is critical to the economy.
“It is vital that companies compete based on the quality of their products and services—rather than which ones can best exploit financial loopholes like shadow insurance that put consumers and taxpayers at greater risk.”
“Our investigations shows that this is a problem all across the nation, so I encourage other state governments—as well as our federal officials—to look into these questionable transactions immediately to protect all consumers.”
The report. entitled Shining a Light on Shadow Insurance, explains that insurance companies use shadow insurance to shift blocks of insurance policy claims to special entities, such as captive insurance subsidiaries—often in states outside where the companies are based, or else offshore—to take advantage of looser reserve and regulatory requirements.
Benjamin Lawsky, superintendent of financial services, said that a key lesson of the financial crisis is that regulators have a responsibility to shine a light on questionable financial practices that shift risk out of sight and into the shadows.
He said: “This is just the tip of the iceberg. There are billions of dollars in the additional shadow insurance risk on the books of other companies that hasn’t been disclosed.”
To view a full copy of the department of financial services' report, click here .
