PNHP

Private insurers turn to "captives"

Richard Klumpp's Captive Insurance Brief

Wilmington Trust

March 24, 2011

A captive insurance company is a wholly-owned subsidiary created to provide insurance to its parent company (or companies).

Once established, it operates like any commercial insurer, i.e., it assumes the risk of its parent/owner in exchange for a pre-determined premium payment.

April 27, 2011

While captives are real insurance companies, they are essentially a form of self insurance, especially for single parent captives. Unexpected losses, if they occur, will negatively impact the profits of the parent firm.

http://blog.wilmingtontrustcaptiveinsurance.com/

And…

Seeking Business, States Loosen Insurance Rules

By Mary Williams Walsh and Louise Story
The New York Times, May 8, 2011

Companies looking to do business in secret once had to travel to places like the Cayman Islands or Bermuda.

Vermont, and a handful of other states including Utah, South Carolina, Delaware and Hawaii, are aggressively remaking themselves as destinations of choice for the kind of complex private insurance transactions once done almost exclusively offshore. Roughly 30 states have passed some type of law to allow companies to set up special insurance subsidiaries called captives, which can conduct Bermuda-style financial wizardry right in a policyholder’s own backyard.

Captives provide insurance to their parent companies, and the term originally referred to subsidiaries set up by any large company to insure the company’s own risks. Oil companies, for example, used them for years to gird for environmental claims related to infrequent but potentially high-cost events. They did so in overseas locations that offered light regulation amid little concern since the parent company was the only one at risk.

Now some states make it just as easy. And they have broadened the definition of captives so that even insurance companies can create them. This has given rise to concern that a shadow insurance industry is emerging, with less regulation and more potential debt than policyholders know, raising the possibility that some companies will find themselves without enough money to pay future claims. Critics say this is much like the shadow banking system that contributed to the financial crisis.

Aetna recently used a subsidiary in Vermont to refinance a block of health insurance policies, reaping $150 million in savings, according to its chief financial officer, Joseph M. Zubretsky. The main reason is that the insurer did not need to maintain conventional reserves at the same level as would have been required by insurance regulators in Aetna’s home state of Connecticut.

For insurers, these subsidiaries offer ways to unlock some of the money tied up in reserves, making millions available for dividends, acquisitions, bonuses and other projects. Three weeks after Aetna’s deal closed, the company announced it was increasing its dividend fifteenfold.

Another issue is public oversight. State regulators normally require insurance companies to make available reams of detailed information. A policyholder can find every asset in an insurer’s investment portfolio, for instance, or the company the carrier turns to for reinsurance. But not if the insurer relies on a captive. The new state laws make the audited financial statements of the captives confidential.

“We are concerned about systems that usher in less robust financial security and oversight,” said Dave Jones, the California insurance commissioner.

While saying that he wanted to remain open to innovation, Mr. Jones added, “We need to ensure that innovative transactions are not a strategy to drain value away from policyholders only to provide short-term enrichment to shareholders and investment bankers.”

http://www.nytimes.com/2011/05/09/business/economy/09insure.html?hp=&pagewanted=all

Comment: 

By Don McCanne, MD

Aetna has established a “captive” which has enabled it to refinance a block of health insurance policies for the purpose allowing it to maintain a lower level of reserves, under the cloak of confidentiality. Unlocking that money by removing it from reserves has enabled it to increase its dividends fifteen fold.

This is the industry that Congress has insisted must remain in charge of our health care financing. They create insurance products we can’t afford with benefits that won’t adequately protect us. They waste tremendous resources in their administrative excesses. And for what? To enrich shareholders and investment bankers by draining value away from policyholders?

Why is there no outrage? Why do Americans remain silent as our public stewards force us into giving control of our health care dollars to these crooks? Americans have made it clear that they don’t want our Medicare dollars to be placed in the hands of these thieves. Why can’t Americans make the connect that we could throw these jerks out and place all of our health care dollars into our own Medicare program?

Private insurers turn to “captives”

Richard Klumpp’s Captive Insurance Brief

Wilmington Trust

March 24, 2011

A captive insurance company is a wholly-owned subsidiary created to provide insurance to its parent company (or companies).

Once established, it operates like any commercial insurer, i.e., it assumes the risk of its parent/owner in exchange for a pre-determined premium payment.

April 27, 2011

While captives are real insurance companies, they are essentially a form of self insurance, especially for single parent captives. Unexpected losses, if they occur, will negatively impact the profits of the parent firm.

http://blog.wilmingtontrustcaptiveinsurance.com/

And…

Seeking Business, States Loosen Insurance Rules

By Mary Williams Walsh and Louise Story
The New York Times, May 8, 2011

Companies looking to do business in secret once had to travel to places like the Cayman Islands or Bermuda.

Vermont, and a handful of other states including Utah, South Carolina, Delaware and Hawaii, are aggressively remaking themselves as destinations of choice for the kind of complex private insurance transactions once done almost exclusively offshore. Roughly 30 states have passed some type of law to allow companies to set up special insurance subsidiaries called captives, which can conduct Bermuda-style financial wizardry right in a policyholder’s own backyard.

Captives provide insurance to their parent companies, and the term originally referred to subsidiaries set up by any large company to insure the company’s own risks. Oil companies, for example, used them for years to gird for environmental claims related to infrequent but potentially high-cost events. They did so in overseas locations that offered light regulation amid little concern since the parent company was the only one at risk.

Now some states make it just as easy. And they have broadened the definition of captives so that even insurance companies can create them. This has given rise to concern that a shadow insurance industry is emerging, with less regulation and more potential debt than policyholders know, raising the possibility that some companies will find themselves without enough money to pay future claims. Critics say this is much like the shadow banking system that contributed to the financial crisis.

Aetna recently used a subsidiary in Vermont to refinance a block of health insurance policies, reaping $150 million in savings, according to its chief financial officer, Joseph M. Zubretsky. The main reason is that the insurer did not need to maintain conventional reserves at the same level as would have been required by insurance regulators in Aetna’s home state of Connecticut.

For insurers, these subsidiaries offer ways to unlock some of the money tied up in reserves, making millions available for dividends, acquisitions, bonuses and other projects. Three weeks after Aetna’s deal closed, the company announced it was increasing its dividend fifteenfold.

Another issue is public oversight. State regulators normally require insurance companies to make available reams of detailed information. A policyholder can find every asset in an insurer’s investment portfolio, for instance, or the company the carrier turns to for reinsurance. But not if the insurer relies on a captive. The new state laws make the audited financial statements of the captives confidential.

“We are concerned about systems that usher in less robust financial security and oversight,” said Dave Jones, the California insurance commissioner.

While saying that he wanted to remain open to innovation, Mr. Jones added, “We need to ensure that innovative transactions are not a strategy to drain value away from policyholders only to provide short-term enrichment to shareholders and investment bankers.”

http://www.nytimes.com/2011/05/09/business/economy/09insure.html?hp=&pagewanted=all

Aetna has established a “captive” which has enabled it to refinance a block of health insurance policies for the purpose allowing it to maintain a lower level of reserves, under the cloak of confidentiality. Unlocking that money by removing it from reserves has enabled it to increase its dividends fifteen fold.

This is the industry that Congress has insisted must remain in charge of our health care financing. They create insurance products we can’t afford with benefits that won’t adequately protect us. They waste tremendous resources in their administrative excesses. And for what? To enrich shareholders and investment bankers by draining value away from policyholders?

Why is there no outrage? Why do Americans remain silent as our public stewards force us into giving control of our health care dollars to these crooks? Americans have made it clear that they don’t want our Medicare dollars to be placed in the hands of these thieves. Why can’t Americans make the connect that we could throw these jerks out and place all of our health care dollars into our own Medicare program?