Iowa at Center of Debate Over 'shadow Insurance' Deals

Aug 31, 2016

  1. Brian Anderson

    Brian Anderson Executive Editor

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    Interesting piece in today’s Chicago Tribune explains why some insurers have moved HQ operations to Iowa to take advantage of a state law intended to draw them to the state. Opponents of the practice say it shouldn’t be so confidential and is inherently risky.

    Here’s the intro plus some excerpts:

    For cash-strapped life insurance companies, the deal sounds almost too good to be true: A state law allows them to create complex financial instruments to transfer liabilities to new subsidiaries, instantly wiping huge debts off their books.

    So-called "shadow insurance" agreements have exploded over the last decade, but a growing number of critics, including economists and consumer advocates, say the practice threatens the solvency of insurers and puts policyholders and taxpayers at risk.

    …these opaque instruments are not being concocted on Wall Street. They emerged in places like Cedar Rapids, Iowa, at the headquarters of TransAmerica Life, a subsidiary of the Netherlands-based Aegon NV, which was deemed one of nine too-big-to-fail insurers in the world by a global standards board last year.

    The system works like this: Insurers create wholly owned subsidiaries on paper that assume some of the company's liabilities. Those debts are transferred off the parent company's books, lowering the amount of capital reserves they are required to hold to pay off policies. That frees up cash that companies can use instead to pay dividends, make acquisitions and increase executive pay, all while shaving their federal tax bills.

    …the practice may reduce the price of life insurance policies by about 10 percent on average but also increases the risk of default.

    … Bellevue, Washington-based Symetra Life Insurance Company announced it was moving its legal headquarters to Iowa "to take advantage of the state-of-the-art statutes and regulations governing the life insurance industry in Iowa." Symetra has since set up one of the shadow insurers in the state, but its size pales in comparison to those created by TransAmerica.

    Iowa at center of debate over 'shadow insurance' deals - Chicago Tribune

    Des Moines/West Des Moines was already one of the country’s “Insurance Capitals,” but passing a law like this in 2010 reminds me a little bit of what South Dakota did to land Citibank.