419 Plan Litigation

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 rations. These ratios are an important measurement of solvency.

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