Shadow Life Insurance Could Have Negative Impact on Policyholders

shadow life insuranceLife insurance companies have taken on a new arrangement that could have a negative impact on policyholders, a report issued by New York State’s financial regulators revealed this week. The arrangement, known as shadow life insurance, is said to make insurers appear more financially secure than they really are, which is misleading at best for consumers.

Shadow Life Insurance Puts Policyholders at Financial Risk

The New York Department of Financial Services (DFS) released a 23-page report revealing that the new life insurance arrangement, which has become commonplace among New York-based companies, could potentially have a tremendous impact on policyholders.

Shadow life insurance, according to the report, is the act of life insurance companies using their captive entities (such as offshore locations) to make it possible for parent companies to divert reserves for purposes other than paying policyholder claims.

By moving their reserves to their self-created subsidiaries, they have the ability to artificially boost the risk-based capital buffers they report to regulators.

After investigating undisclosed New York-based life insurers, the DFS uncovered at least $48 billion in hidden shadow insurance deals through “shell companies in other states and offshore.”

These deals put policyholders at risk because they make insurance companies appear to have billions available to payout to policyholders who file claims, when in actuality, the money is being used by their subsidiaries.

Regulators Propose to Regulate Misleading Life Insurance

To protect life insurance policyholders, the DFS is working to regulate these arrangements by first requiring that all life insurers based in New York provide information on their shadow insurance transactions.

The DFS also plans to make the following recommendations to address its risks:

  • The National Association of Insurance Commissioners (NAIC) should develop enhanced disclosure requirements for shadow insurance across the country.
  • The Federal Insurance Office (FIO), Office of Financial Research (OFR), NAIC and other state insurance commissioners should conduct investigations similar to that of the DFS to document a more complete picture of shadow insurance.
  • State insurance commissioners should consider an immediate national moratorium on approving additional shadow life insurance transactions until those investigations are complete and a full picture emerges.

“Shadow insurance undermines transparency and accountability in the financial and insurance industries which is critical to our economy,” New York Gov. Andrew Cuomo said in a statement.

“It is vital that companies compete based on the quality of their products and services — rather than which ones can best exploit financial loopholes like shadow insurance that put consumers and taxpayers at greater risk,” said Gov. Cuomo.

(Image courtesy of Teerapun /