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Advisors Jump Into Shadow Insurance Debate

New York’s recent report blasting so-called shadow insurance through captives as “financial alchemy” is the subject of push-back from some concerned advisors...


New York’s recent report blasting so-called shadow insurance through captives as “financial alchemy” is the subject of push-back from some concerned advisors.

Two financial firms posted a white paper that seeks to inject some “context and balance” into the controversial issues raised by New York. It also cautions that using “alarmist tactics that seek to scare consumers are of little benefit.”

Pinnacle Financial Group, in partnership with M Financial Group, indicatedthey wrote their white paper after reading Shining a Light on Shadow Insurance,a 24-page report released last month by the New York State Department of Financial Services (DFS), and after noticing various media responses.

Some media had used the report as a basis for characterizing captives as “complex tools companies use as a means to present a more robust financial portrait than may be the case,” Pinnacle and M contended.

Pinnacle is a financial advisory firm based in Southborough, Mass. It is a member firm and shareholder of M Financial Group of Portland, Ore, a financial services distribution company that also has a reinsurance facility, M Financial Re, for reinsuring products written through the M network.

Unlikely duo

Pinnacle and M may seem like an unlikely duo to write a white paper on a report from the New York DFS, given that their main business is advisory in nature, primarily in the affluent and corporate markets.

However, Pinnacle executives told InsuranceNewsNet that when they saw the New York document, they questioned certain assumptions the report made. In response, they sought feedback from carriers and reviewed comments from other industry sources, and then decided to provide their own input.

Their white paper, The Use of Captive Reinsurance Transactions in the Life Insurance Industry, is the result.

The posting discusses the uses and mechanics of captives and comments by various industry sources, but it also attempts to set the record straight in a few of the areas raised by the New York regulators.

The New York DFS report had depicted shadow insurance as the means by which certain insurers have been shifting blocks of insurance policy claims to special out-of-state (or out-of-country) shell companies, or captives, which the carriers then use to reinsure existing policy claims. DFS contended this arrangement — or “complex shell game,” as DFS phrased it — enables carriers to divert policy reserves to other purposes while the parent company remains “on the hook” through parental guarantee. DFS further noted that this is being done with limited disclosure in publicly available documents.

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In their white paper, Pinnacle and M Financial indicated that they also “are focused on the scrutiny of captives and the impact captives may have on policyholders.” They pointed to a statement from the American Council of Life Insurers (ACLI) indicating support for “national adoption of proposals to enhance disclosure involving these transactions.” They cited other industry sources as supporting continued discussion about increased regulatory scrutiny and transparency surrounding life captive reinsurers.

But they also pointed to a viable role for captives in the life insurance business.

“Based on our understanding, which is supported by conversations with carriers and analysis of statements from rating agencies and regulators, captives can provide an appropriate and efficient vehicle for segregating and spreading risk, lowering the cost of reserve financing, and ultimately providing better pricing for consumers,” they wrote.


Their concern over the New York report has something to do with accuracy and perspective. For instance:

Regulatory moratorium: The DFS report calls for a national moratorium on captive reinsurance transactions, the firms wrote. (In the report, DFS suggests that the moratorium should last until regulatory authorities have completed an investigation into these transactions.)

But the National Association of Insurance Commissioners (NAIC) has been studying the use of captive reinsurers for more than a year, Pinnacle and M Financial wrote. They pointed to NAIC’s Captive and Special Purpose Vehicle (SPV) Use Subgroup as an example. This subgroup is part of NAIC’s Financial Condition (E) Committee.

(Note: At a July 17 meeting, the E Committee adopted a white paper on captives and special purpose vehicles developed by this subgroup. Among its recommendations are calls for enhanced disclosure and transparency, as well as uniform standards for regulators.)

Ratings issue: “The (DFS) report implied that rating agencies do not consider captives as part of their assessment of insurance company financial strength,” the Pinnacle/M white paper contended.

However, “this implication was incorrect,” Pinnacle and M wrote. “Rating agencies are aware of — and assess — captive arrangements, including the ultimate collateral backing the redundant reserves, with such analysis impacting insurance company financial strength ratings.”

Bottom line: “We support an open dialogue, supported by disclosure and transparency that facilitates informed consumer decisions,” the firms wrote.

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, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at

© Entire contents copyright 2013 by Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from


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