It may be time to start paying attention to Benjamin Lawsky, New York’s superintendent of financial services, who for the last few months has been warning about a scam in the life insurance industry that could create a mess akin to the one that brought the banking industry — and the nation’s economy — to its knees a half-dozen years ago.
At issue are some new accounting rules adopted by regulators in all 50 states that were designed to make sure insurance companies keep enough assets to pay anticipated claims. But according to Lawsky, the rules are a sham that have given insurers license to do just the opposite, to “cook the books” so they look like they’re in far better financial shape than they really are. Fearing a crisis that could render insurers unable to meet future obligations, Lawsky on Friday pulled New York out of the 50-state agreement and urged his colleagues in other states to go back to the old accounting methods.
A big problem here is that states, not the federal government, are responsible for regulating insurers. The new rules have encouraged insurers to employ creative schemes that basically allow them to police themselves, and to pit one state against another in an effort to woo their business (a good chunk of which, like banks, has been based in New York).
According to a June 11 New York Times story, some states looking to land big insurance company operations have relaxed their rules, then invoked confidentiality laws to avoid disclosing the particulars. This has made it hard for New York regulators to figure out what’s going on. But in a Times story Thursday, Lawsky said that in a sample of 16 insurers claiming to have increased their reserves by $10 billion, he found increases of only $668 million.
There’s a lot at stake here, of course. Americans invest billions in things like universal life policies (which, in addition to a death benefit, provides some cash value along the way). If they or their heirs were suddenly unable to collect, the losses would dwarf those from the Savings & Loan scandal of three decades ago. And there is no federal insurance backup equivalent to the FSLIC or FDIC for bank deposits. Of course there would be heavy pressure for federal bailouts.
Some effort by the feds, perhaps through the newly created Federal Insurance Office, must be made to get to the bottom of Lawsky’s allegations; he’s not some crackpot conspiracy theorist. And as anyone who remembers anything about the Lawrence Group scandal of the 1990s knows, insurance is an incredibly complex business, making it a cinch to hoodwink anyone but the most savvy, disciplined investigator.