Insurance companies use captives to mislead regulators.

Lance Wallach

Consumers have been cheated by some life Insurance companies repeatedly over the years. For instance some companies had used what the IRS called abusive tax shelters to sell large amounts of life insurance. When the IRS became aware of the situation the consumers were issued very large fines.  For the last five years some life insurance companies have doubled their use of another tool to mislead consumers.

Many life insurance companies are using captive insurance to alter their books and look better. This could lead to another taxpayer bailout and insurance companies being taken over. This would put benefits in policies at risk for some policyholders.

By using a captive many insurance companies allow the companies to describe themselves as richer and stronger. This misleads regulators, the ratings agency and consumers who rely on rating. The NY insurance dept. said the insurance based in New York had burnished their books by $48 billion using captive insurance companies, often owned by the insurers.

I have been writing about some problems with captives for years, and this is one of the problems. The use of a captive to mislead people is not what captives are for, but some of them do this.

Insurance regulation is based on solvency. Because the transactions of using captives make companies look richer than they normally would be, so insurance companies are diverting reserves to other uses like executive compensation and stockholder dividends to try to raise the price of their stock. This is not a problem with mutual insurance companies where the insured’s are the stockholders.

By using a captive and trying to hide the fact, some insurance companies artificially increase their risk based capital ratios. These ratios are an important measurement of solvency.

Life insurer’s use of captive to shift obligations from their balance sheets has nearly doubled over the last few years. My concern is that the transactions of using captives do not accomplish the stated goal of transferring risk. Of course the insurance companies argue the opposite. Google Lance Wallach for more articles on captives.

Some of the largest life insurance groups are MetLife, ING, Prudential, A.I.G., AEGON, Hartford, Manulife, Lincoln National, and ASA.

Insurance companies have been playing games for years. To sell more insurance many insurance companies have sold 419 and other plans that the IRS has called abusive transactions. Even after the IRS went after the buyers with large fines the insurance companies continued to sell life insurance inside of these plans. They also sold abusive 412i policies in the past with the same result. Now they are selling so called sections 79 plans which the IRS is looking at. As an expert witness in these types of cases my side has never lost a case.

Using captives is just the latest plan that many insurance companies are now using to look better. The state of NY is trying to do something about this. Most other states have not yet taken notice.

 Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.