States are loosening their insurance regulations to draw business from companies that typically look outside the U.S. to make complex transactions.
The New York Times reports that states like Vermont, Utah, South Carolina, and Hawaii are changing their state insurance rules to allow companies to create special insurance subsidiaries called captives. Captives have long been used in the oil industry, but changes to the state laws now expand the definition of captives to include insurance companies.
Some insurers have been cashing in on the new regulation. Aetna was able to refinance a block of health insurance policies through a subsidiary in Vermont, saving the company $150 million. At the height of the economic downturn in 2008, MetLife was able to use a subsidiary in the same state to take over a $3.5 billion letter of credit, which allowed the company to stay afloat.
While companies and states are reaping the benefits of the captives, some insurance regulators have expressed concerns about devaluing the state’s financial security and oversight.
“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,” Dave Jones, the California insurance commissioner.
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