boutons_deux
06-14-2013, 06:10 AM
Insurers Inflating Books, New York Regulator Says
New York State regulators are calling for a nationwide moratorium on transactions that life insurers are using to alter their books by billions of dollars, saying that the deals put policyholders at risk and could lead to another taxpayer bailout.
Insurers’ use of the secretive transactions has become widespread, nearly doubling over the last five years. The deals now affect life insurance policies worth trillions of dollars, according to an analysis done for The New York Times by SNL Financial, a research and data firm.
These complex private deals allow the companies to describe themselves as richer and stronger than they otherwise could in their communications with regulators, stockholders, the ratings agencies and customers, who often rely on ratings to buy insurance.
Benjamin M. Lawsky, New York’s superintendent of financial services, said that life insurers based in New York had alone burnished their books by $48 billion, using what he called “shadow insurance,” according to an investigation conducted by his department. He issued a report (http://www.dfs.ny.gov/reportpub/shadow_insurance_report_2013.pdf) about the investigation late Tuesday.
The transactions are so opaque that Mr. Lawsky said it took his team of investigators nearly a year to follow the paper trail, even though they had the power to subpoena documents.
Insurance is regulated by the states, and Mr. Lawsky said his investigators found that life insurers in New York were seeking out states with looser regulations and setting up shell companies there for the deals. They then used those states’ tight secrecy laws to avoid scrutiny by the New York State regulators.
Insurance regulation is based squarely on the concept of solvency — the idea that future claims can be predicted fairly accurately and that each insurer should track them and keep enough reserves on hand to pay all of them. The states have detailed rules for what types of assets reserves can be invested in. Companies are also expected to keep a little more than they really expect to need — called their surplus — as a buffer against unexpected events. State regulators monitor the reserves and surpluses of companies and make sure none fall short.
Mr. Lawsky said that because the transactions made companies look richer than they otherwise would, some were diverting reserves to other uses, like executive compensation or stockholder dividends.
The most frequent use, he said, was to artificially increase companies’ risk-based capital ratios, an important measurement of solvency that was instituted after a series of life-insurance failures and near misses in the 1980s.
Mr. Lawsky said he was struck by similarities between what the life insurers were doing now and the issuing of structured mortgage securities in the run-up to the financial crisis of 2008.
“Those practices were used to water down capital buffers, as well as temporarily boost quarterly profits and stock prices,” Mr. Lawsky said. “And ultimately, those practices left those very same companies on the hook for hundreds of billions of dollars in losses from risks hidden in the shadows, and led to a multitrillion-dollar taxpayer bailout.”
http://dealbook.nytimes.com/2013/06/11/insurers-inflating-books-new-york-regulator-says/?pagewanted=print
New York State regulators are calling for a nationwide moratorium on transactions that life insurers are using to alter their books by billions of dollars, saying that the deals put policyholders at risk and could lead to another taxpayer bailout.
Insurers’ use of the secretive transactions has become widespread, nearly doubling over the last five years. The deals now affect life insurance policies worth trillions of dollars, according to an analysis done for The New York Times by SNL Financial, a research and data firm.
These complex private deals allow the companies to describe themselves as richer and stronger than they otherwise could in their communications with regulators, stockholders, the ratings agencies and customers, who often rely on ratings to buy insurance.
Benjamin M. Lawsky, New York’s superintendent of financial services, said that life insurers based in New York had alone burnished their books by $48 billion, using what he called “shadow insurance,” according to an investigation conducted by his department. He issued a report (http://www.dfs.ny.gov/reportpub/shadow_insurance_report_2013.pdf) about the investigation late Tuesday.
The transactions are so opaque that Mr. Lawsky said it took his team of investigators nearly a year to follow the paper trail, even though they had the power to subpoena documents.
Insurance is regulated by the states, and Mr. Lawsky said his investigators found that life insurers in New York were seeking out states with looser regulations and setting up shell companies there for the deals. They then used those states’ tight secrecy laws to avoid scrutiny by the New York State regulators.
Insurance regulation is based squarely on the concept of solvency — the idea that future claims can be predicted fairly accurately and that each insurer should track them and keep enough reserves on hand to pay all of them. The states have detailed rules for what types of assets reserves can be invested in. Companies are also expected to keep a little more than they really expect to need — called their surplus — as a buffer against unexpected events. State regulators monitor the reserves and surpluses of companies and make sure none fall short.
Mr. Lawsky said that because the transactions made companies look richer than they otherwise would, some were diverting reserves to other uses, like executive compensation or stockholder dividends.
The most frequent use, he said, was to artificially increase companies’ risk-based capital ratios, an important measurement of solvency that was instituted after a series of life-insurance failures and near misses in the 1980s.
Mr. Lawsky said he was struck by similarities between what the life insurers were doing now and the issuing of structured mortgage securities in the run-up to the financial crisis of 2008.
“Those practices were used to water down capital buffers, as well as temporarily boost quarterly profits and stock prices,” Mr. Lawsky said. “And ultimately, those practices left those very same companies on the hook for hundreds of billions of dollars in losses from risks hidden in the shadows, and led to a multitrillion-dollar taxpayer bailout.”
http://dealbook.nytimes.com/2013/06/11/insurers-inflating-books-new-york-regulator-says/?pagewanted=print