Seeking Business, States Loosen Insurance Rules

Today, all it takes is a trip to Vermont.

Vermont, and a handful of other states including Utah, South Carolina, Delaware and Hawaii, are aggressively remaking themselves as destinations of choice for the kind of complex private insurance transactions once done almost exclusively offshore. Roughly 30 states have passed some type of law to allow companies to set up special insurance subsidiaries called captives, which can conduct Bermuda-style financial wizardry right in a policyholder’s own backyard.

Captives provide insurance to their parent companies, and the term originally referred to subsidiaries set up by any large company to insure the company’s own risks. Oil companies, for example, used them for years to gird for environmental claims related to infrequent but potentially high-cost events. They did so in overseas locations that offered light regulation amid little concern since the parent company was the only one at risk.

Now some states make it just as easy. And they have broadened the definition of captives so that even insurance companies can create them. This has given rise to concern that a shadow insurance industry is emerging, with less regulation and more potential debt than policyholders know, raising the possibility that some companies will find themselves without enough money to pay future claims. Critics say this is much like the shadow banking system that contributed to the financial crisis.

Aetna recently used a subsidiary in Vermont to refinance a block of health insurance policies, reaping $150 million in savings, according to its chief financial officer, Joseph M. Zubretsky. The main reason is that the insurer did not need to maintain conventional reserves at the same level as would have been required by insurance regulators in Aetna’s home state of Connecticut.

In other big transactions, companies including MetLife, the Hartford Financial Services Group, Swiss Reinsurance, Genworth Financial and the American International Group, among others, have refinanced life, disability and long-term-care insurance policies, as well as annuities.

For the states, attracting these insurance deals promotes business travel and creates jobs for lawyers, actuaries and other white-collar workers, who pay taxes. States have also found that they can impose modest taxes on the premiums collected by captives.

For insurers, these subsidiaries offer ways to unlock some of the money tied up in reserves, making millions available for dividends, acquisitions, bonuses and other projects. Three weeks after Aetna’s deal closed, the company announced it was increasing its dividend fifteenfold.

And as changes to the nation’s health systems are phased in, such innovations might even help hold down the cost of insurance for consumers, much as selling pooled mortgages to investors has made buying a home less expensive.

The downside, though, is that the states are offering a refuge from other states’ insurance rules, especially the all-important ones requiring companies to have sufficient reserves. California, for one, has already chosen not to try to lure such businesses. “We are concerned about systems that usher in less robust financial security and oversight,” said Dave Jones, the California insurance commissioner.

While saying that he wanted to remain open to innovation, Mr. Jones added, “We need to ensure that innovative transactions are not a strategy to drain value away from policyholders only to provide short-term enrichment to shareholders and investment bankers.”

The cost of some of the deals has been considerable. In 2008, MetLife used a subsidiary in Vermont to handle a crucial $3.5 billion letter of credit, with help from Deutsche Bank, because the subsidiary was not subject to the same collateral requirements as in New York. The trade immediately bolstered MetLife’s balance sheet, helping the company to endure that year’s market turmoil without government assistance. But MetLife agreed to pay Deutsche Bank $3.5 million a year for 15 years, according to internal documents obtained by The New York Times — locking itself into high costs for years.

MetLife said its transaction was in keeping with industry rules and norms, and Deutsche Bank declined to comment.

Another issue is public oversight. State regulators normally require insurance companies to make available reams of detailed information. A policyholder can find every asset in an insurer’s investment portfolio, for instance, or the company the carrier turns to for reinsurance. But not if the insurer relies on a captive. The new state laws make the audited financial statements of the captives confidential.

 

Arizona Governor Rejects Bid to Loosen Gun Rules

The surprise veto of the gun measure disappointed advocates of gun rights, who vowed to bring it back next year. The bill, as originally proposed, would have allowed guns everywhere on campus, including in classrooms. In the face of strong criticism, it was amended to permit weapons only on “a public right of way” within campuses, which legislative supporters said they understood to mean sidewalks and roads.

But Ms. Brewer, a strong advocate of gun rights, who has supported loosening restrictions on guns in the past, said the language was unclear.

Cheering the governor’s decision were university administrators, faculty members, police chiefs and students, all of whom strongly opposed the measure because they said it would have brought an element of danger into the academy.

“We come to school to learn and don’t need any more distractions,” said Kim Sell, a nutritional sciences major at the University of Arizona in Tucson, who was interviewed near a sign at the entrance to campus that declares, “Weapon free zone.”

A desire to spare additional problems for Arizona prompted Ms. Brewer to veto the so-called birther bill that would have required presidential candidates to present their long-form birth certificates or other documents to prove their citizenship, a measure pressed by lawmakers who question President Obama’s birthplace.

“I never imagined being presented with a bill that could require candidates for president of the greatest and most powerful nation on earth to submit ‘early baptismal or circumcision certificates’ among other records to the Arizona secretary of state,” the governor wrote in her veto statement. “This is a bridge too far.”

On the gun measure, State Senator Ron Gould, a Republican from Lake Havasu City , argued that students and professors were vulnerable to armed attackers and should not have their Second Amendment rights restricted on campus. Utah is the only state that requires universities to allow guns on their campuses.

A requirement in early versions of the bill that those carrying weapons on campus complete a concealed-weapon training course did little to assuage the concerns of critics.

“Law enforcement intervention should be done by law enforcement personnel who have been specifically selected and trained to perform these duties, not by individuals who may have marginally completed an eight-hour course years ago or other marginal training and possibly have not practiced with the firearm they are now carrying,” the chiefs of police from Arizona State University, the University of Arizona and Northern Arizona University said in a joint letter to lawmakers urging defeat of the bill.

Arizona leaves it up to the state’s colleges and universities to set their own policies on firearms, and all institutions of higher education currently ban them.

Marisa Gerber contributed reporting from Tucson.