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Captives, Special Purpose Vehicles Draw Fire

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The New York Times has published an article raising questions about whether use of captive insurers could weaken insurance industry oversight.

The Times ran the article, by Mary Williams Walsh and Louise Story, on the front page, immediately below the masthead.

“Companies looking to do business in secret once had to travel to places like the Cayman Islands or Bermuda,” the reporters begin. “Today, all it takes is a trip to Vermont.”

The reporters note that a number of large life insurers and reinsurers have used captives in Vermont to refinance life, disability, long term care and annuity business.

The reporters do not cite any examples of problems occurring as a result of the use of Vermont-based captives, but they say American International Group Inc., New York (AIG), used a captive reinsurance subsidiary to get $7 billion in mortgage insurance claims off its books and resume selling policies.

The reporters quote California Insurance Commissioner Dave Jones as saying that California has decided not to seek captive insurer business because of concerns about the possibility that the approach could weaken insurers’ financial security and regulators’ ability to oversee insurers.

In related news, Moody’s Investors Service, New York, has suggested it will grant only partial credit for a health insurer’s use of special purpose vehicles overseen by regulators in Vermont to back health insurance business.

One factor is the terms of the arrangement, and another consideration is Moody’s conclusion that the financing used in the special purpose vehicles is limited and temporary in nature, Moody’s says.

- Allison Bell

Other captive insurer and special-purpose vehicle coverage from National Underwriter Life & Health: