Thursday, August 21, 2014

No. 66: Lawsky's Strong Letter about Captives

On August 12, 2014, Benjamin Lawsky, Superintendent of the New York Department of Financial Services, wrote to his fellow insurance commissioners about the recent work of the National Association of Insurance Commissioners (NAIC) relating to captive insurance companies owned by life insurance companies. The letter is strongly worded and highly critical of the NAIC.

The Lawsky Letter
Lawsky refers to the February 2014 report prepared by the NAIC's consultant, Rector & Associates, Inc., and the revised and weakened June 2014 Rector report. At the end of the first paragraph of his letter, Lawsky says that if the NAIC cannot devise a better means of policing the use of captives by life insurance companies, it would all but invite federal authorities to do so. Here is the final paragraph of the Lawsky letter:
When the NAIC enlisted Rector to address the troubling boom of reserve financing through captives, it appeared to be doing so with a seriousness and urgency that recognized that these structures pose a clear and present danger to our system. Sadly, the revised and now-defanged [Rector] report simply permits more of the same. The NAIC's initial seriousness and urgency on this issue appears to have been overcome by industry lobbying. As we recognized last year, if the NAIC fails to take meaningful action with respect to captives, we will have left unresolved a gaping regulatory problem that is central to the safety and soundness of our system and the protection of policyholders. And that is where we find ourselves today.
Lawsky sent copies of his letter to three federal officials. They are Jacob Lew, Secretary of the Treasury; Mary Miller, Under Secretary of the Treasury for Domestic Finance; and Michael McRaith, Director of the Federal Insurance Office in the Department of the Treasury.

General Observations
I have long been critical of state insurance regulators for ignoring the need to strengthen rather than weaken financial requirements in the face of exotic new products. For example, in the March 2013 issue of The Insurance Forum, I wrote a major article entitled "A Review of More Than a Century of Efforts to Weaken Life Insurance Reserves." In that article, I expressed the opinion that so-called principles based reserves are contrary to the public interest and are a form of reserve weakening whose impact will not be fully revealed for many decades. I applaud Superintendent Lawsky for speaking out forcefully about the reserve weakening and artificial balance sheet inflation caused by the improper use of captives owned by life insurance companies.

I am offering a complimentary PDF of the four-page Lawsky letter. Send an e-mail to and ask for Lawsky's August 12 letter about captives.