"MetLife has acted wisely in bringing this subsidiary back to the United States where it will be subject to stronger rules and oversight. The company's decision represents a step in the right direction as we seek to address the risks created by the shadowy world of 'captive' reinsurance. These captive reinsurance arrangements -- which we call shadow insurance -- are all too often parked offshore or in other lightly regulated jurisdictions where they are insufficiently understood and monitored. Now is the time to address these troubling vehicles before policyholders and our economy are seriously damaged. We will aggressively continue our investigation into shadow insurance across the industry."

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Additional Background

• To view a copy of MetLife’s 2013 Investor Day Presentation (captive reinsurance referenced on pages 18 and 19) released today, please visit, link.
• In July 2012, the New York State Department of Financial Services (DFS) launched an extensive investigation into shadow insurance.
• In April 2013, Superintendent Lawsky delivered a speech at the 22nd Annual Hyman P. Minsky Conference in which he laid out DFS’s concerns related to shadow insurance. Excerpts from those remarks are included below. To view a full copy of the speech, please visit, link.

Superintendent Lawsky’s Remarks on Shadow Insurance at the 22nd Annual Hyman P. Minsky Conference

“Another area that we’re hard at work on relates to the use of what are called captive insurance companies, used to quietly off-load risk and increase leverage at some of the world’s largest financial firms.

“In July 2012, the New York State Department of Financial Services initiated a serious investigation into this somewhat obscure area that – we believe – could put insurance policyholders and taxpayers at greater risk.

“Insurance companies use these captives to shift blocks of insurance policy claims to special entities – often in states outside where the companies are based, or else offshore (e.g., the Cayman Islands) – in order to take advantage of looser reserve and oversight requirements. (Reserves are funds that insurers set aside to pay policyholder claims.)

“In a typical transaction, an insurance company creates a “captive” insurance subsidiary, which is essentially a shell company owned by the insurer’s parent. The company then “reinsures” a block of existing policy claims through the shell company – and diverts the reserves that it had previously set aside to pay policyholders to other purposes, since the reserve requirements for the captive shell company are typically lower. (Sometimes the parent company even effectively pays a commission to itself from the shell company when the transaction is complete.)

“However, this financial alchemy, let’s call it ‘shadow insurance,’ does not actually transfer the risk for those insurance policies off the parent company’s books, because in many instances, the parent company is ultimately still on the hook for paying claims if the shell company’s weaker reserves are exhausted (“a parental guarantee”).

“That means that when the time finally comes for a policyholder to collect their promised benefits after years of paying premiums – such as when there is a death in their family – there is a smaller reserve buffer available at the insurance company to ensure that the policyholders receive the benefits to which they are legally entitled.

“We believe that shadow insurance also puts the stability of the broader financial system at greater risk. Indeed, in a number of ways, shadow insurance is reminiscent of certain practices used in the run-up to the financial crisis, such as issuing subprime mortgage-backed securities (MBS) through structured investment vehicles (“SIVs”) and writing credit default swaps on higher-risk MBS. Those practices were used to water down capital buffers, as well as temporarily boost quarterly profits and stock prices at numerous financial institutions. And ultimately, those practices left those very same companies on the hook for hundreds of billions of dollars in losses from risks hidden in the shadows, and led to a multi-trillion dollar taxpayer bailout.

“Similarly, shadow insurance could leave insurance companies less able to deal with losses. The events at AIG’s Financial Products unit in the lead up to the financial crisis demonstrate that regulators must remain vigilant about potential threats lurking in unexpected business lines and at more weakly capitalized subsidiaries within a holding company system.

“We are hard at work on our continuing investigation into shadow insurance. And we hope to shed light on and further stimulate a national debate on this important issue to our financial system.”