Friday, April 17, 2015

No. 93: The New York Times Examines the Life Insurance Shell Game

The Sunday, April 12, 2015 issue of The New York Times carried a 3,185-word article entitled "Risky Moves in the Game of Life Insurance." The subtitle is "Complex and mostly hidden maneuvers may end up costing taxpayers and policyholders." The article was written by Times reporter Mary Williams Walsh. It began at the bottom of the front page of the business section and the remainder filled the fourth page of the section. The article included a cartoon of a shell game, a chart, and a photograph of Elizur Wright. In 1858 Wright was appointed the insurance commissioner of Massachusetts, thereby became the first insurance regulator in the U.S., and is known today as the "Father of Life Insurance." The electronic version of the article was posted on the Times website on April 11.

Two Interesting Items
An interesting item in the Times article followed a discussion of details of transactions the reporter had seen in public documents. The discussion related to several companies controlled by Goldman Sachs and was followed by this sentence: "The company and its parent declined to confirm the details in those records or comment on the record." One can only wonder why a company would decline to confirm or comment on public information.

Another interesting item in the Times article was a statement that Nick Gerhart, the Iowa insurance commissioner, expressed in an e-mail to the reporter. He called captive reinsurance "a pragmatic approach to address the nationally recognized problem of redundant reserves." The expression "redundant reserves" is used by those intent on dismantling a regulatory system that has stood the test of time for more than 150 years. In other words, they want a system that allows them to reap short-term profits at the expense of long-term financial strength.

I am reminded of the views of the late Spencer L. Kimball, who during his career was the leading scholar in the area of insurance regulation. Kimball said the primary objective of insurance regulation is not the mere solvency of insurance companies, but rather the solidity of the companies. One can only imagine what he would say about promoters who embrace the expression "redundant reserves."

My Writings on the Subject
I wrote extensively in The Insurance Forum about efforts over the years to weaken life insurance reserves. I also wrote on my blog about some of the transactions mentioned in the Times article. See Nos. 44 (April 22, 2014), 66 (August 21, 2014), 71 (November 6, 2014), 72 (November 12, 2014), and 73 (November 16, 2014).

One of the phony entities mentioned in my blog post No. 73 and in the Times article is a Delaware-based LLC named Tapioca View. It issued a $499 million "contingent note," whatever that is, to be carried as an asset by an affiliate. I learned recently that the name of the entity is an anagram, the dictionary definition of which is "a word or phrase made by transposing the letters of another word or phrase." "Tapioca View" is an anagram of "Iowa captive." I think the name of the entity provides insight into the thought process of promoters of captive reinsurance. I do not know whether Commissioner Gerhart and his staff were aware of the anagram.

In No. 73 I also mentioned several entities named Cape Verity. I tried to figure out whether that name is also an anagram. However, all I could get out of it was "yer captive." I would welcome help from readers who are better than I am with anagrams.

General Observations
In my opinion, the Times article is an excellent study of a complex subject and an important contribution toward public understanding of captive reinsurance. Superintendent Benjamin Lawsky of the New York Department of Financial Services calls it "shadow insurance." It is a serious problem facing the life insurance business.

I think the Times article should be read by anyone with an interest in the welfare of the life insurance business and the millions of people who depend on life insurance to protect their beneficiaries. Many readers will find the article difficult to understand, but that is the fault of the perpetrators of the schemes rather than a shortcoming of the article. In other words, promoters of captive reinsurance schemes intend for the schemes to be opaque and incomprehensible, because they would not be permitted if they were disclosed and understood.

In my blog items mentioned above, I offered as complimentary PDFs some documents relating to matters discussed in the Times article. Those documents remain available upon request. At this time I am offering a complimentary two-page PDF containing an April 14 response from Athene, one of the companies mentioned in the Times article. The response apparently was prepared for agents who expressed concerns about the Times article. Send an e-mail to and ask for the Athene response to the New York Times article.