Iowa at center of debate over 'shadow insurance' deals

IOWA CITY, Iowa (AP) — 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 balance sheets.

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.

Life insurers have been seeking more flexibility at a time when they are struggling to cover financial promises made to beneficiaries decades ago, when interest rates were far higher.

The Office of Financial Research — an arm of the U.S. Treasury created after the 2008 financial collapse to analyze risks — called in a report earlier this year for more disclosure of the arrangements and additional requirements that they be backed by quality assets.

After reviewing those statements, Koijen and Yogo found that six of the eight subsidiaries created in Iowa "have significant negative equity under statutory accounting" — meaning their assets are worth less than their liabilities under traditional insurance industry standards.

Belth said he got interested in Iowa's practices two years ago, when 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."