Shadow insurance June 14, 2013 at 7:29 pm
Matt Levine at Dealbreaker points us to a ‘big angry report‘ (his words) on captive reinsurance, by Benjamin Lawsky and his New York State Department of Financial Services. Matt’s certainly right that Ben has a bone to pick, given the ‘at least $48B’ of ‘shadow’ transactions apparently done. But when you look a little more closely, the shadow lifts a little. You see, these trades are only possible because US insurance regulation is, well, easily arbitraged. It’s the same with any regulatory arb – you can’t arb regulations that always treat the same risk the same way. US insurance regulation doesn’t, so you can wave your magic wand and turn primary risk into qualifying reinsurance, and *poof some of the capital has gone. The fact that as Lawsky points out, the reinsurer might well be owned and guaranteed by the insurer’s parent is a rather large hole in the regulatory framework.
I’ll be gone from DEM for a little while, hopefully sunning myself. Have fun while I’m away, gentle reader.