Shadow Insurance

  • Recently I have noticed other disturbing signs, indicated by an increase in formation of overseas domiciled subsidiary or “Shadow Insurers” designed for use in the U.S. surplus markets.
  • These “Shadows” of prominent U.S. insurers are popping up all over the world and are beginning to mark the escape of U.S. insurance company investment capital from our country.

—  Letter – Joseph A. Humphreys, Executive Director, NAIC Non-Admitted Insurers Information Office

1972-1, NAIC Proceedings

  • Shadow insurance refers to transactions ceding liabilities to captive reinsurers under less strict regulation to circumvent the regulatory capital requirement.

2018 – AP – Seeking Accounting Arbitrage: Evidence from the US Life Insurance Industry, by Sehwa Kim, University of Chicago Booth School of Business – 60p

  • This study examines how accounting rules induce the US life insurers to use “shadow insurance” to manage their regulatory capital, and whether they exploit shadow insurance to hold more risky assets when a new accounting rule creates more capital pressure.
  • Shadow insurance refers to transactions ceding liabilities to captive reinsurers under less strict regulation to circumvent the regulatory capital requirement
  • 5. Received the report of the Life and Health Actuarial (Technical) Task Force, which adopted amendments to the Standard Valuation Law on the confidentiality issue being considered by many committees at the NAIC and concluded that new products with “shadow accounts” that provide a universal life secondary guarantee are covered by XXX.

1999-4 NAIC Proc. 

  • 2012 0612 – InsuranceJournal – N.Y. Says Life Insurers’ Use of ‘Shadow Insurance’ Could Hurt Policyholders – [link]
  • 2013 0521 – Press Release – NYSID – Statement of Superintendent Ben Lawsky on MetLife’s Decision to Move Offshore “Captive” Subsidiary Back to the United States – [link]
  • 2013 – Report – NYSID – Shining a Light on Shadow Insurance: A Little-known Loophole That Puts Insurance Policyholders and Taxpayers at Greater Risk, by Ben Lawsky – 24p
  • 2015 – FRB – Self-Fulfilling Runs: Evidence from the US Life Insurance Industry – 52p
  • 2015 – SOA – Update on Regulatory Developments, By Francis de Regnaucourt, fr-2015-iss-102 – Society of Actuaries – 28p
  • 2016 – FRB-M – Shadow Insurance – Federal Reserve Bank of Minneapolis – [Download – Link]
  • 2016 – AP – Taking Shadow Insurance Out of the Shadows: Regulatory Arbitrage, Taxes, and Capital – 57p
  • 2016 0317 – OFR – Mind the Gaps: What Do New Disclosures Tell Us About Life Insurers’ Use of Off-Balance-Sheet Captives?, by Jill Cetina, Arthur Fliegelman, Jonathan Glicoes, and Ruth Leung – 10p
  • 2017 07 – SOA – Return on Capital Enhancement Opportunities for the Life Insurance Industry, By Rebecca Wilczak 2017-reinsurance-news-issue-88 – Society of Actuaries –  44p
    • These fears led to three years of data gathering and analysis by regulators which culminated in a 2014 report by Rector and Associates.3  This report did not confirm many of the concerns with a so-called shadow insurance market, but it did make several recommendations on how to make redundant reserve financing transactions more robust, more consistent, and more transparent.
  • 2018 – AP – Seeking Accounting Arbitrage: Evidence from the US Life Insurance Industry, by Sehwa Kim, University of Chicago Booth School of Business – 60p
    • This study examines how accounting rules induce the US life insurers to use “shadow insurance” to manage their regulatory capital, and whether they exploit shadow insurance to hold more risky assets when a new accounting rule creates more capital pressure.
    • Shadow insurance refers to transactions ceding liabilities to captive reinsurers under less strict regulation to circumvent the regulatory capital requirement
  • 2019 – AP – Essays on Shadow Insurance, by Ying Peng – Ph.d. Thesis, Temple University, Dr. Mary A. Weiss, Dissertation Advisor – 143p