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Iowa at center of debate over ‘shadow insurance’ deals

This undated photo provided by Jeffrey Belth shows Joseph M. Belth, a professor emeritus of insurance at Indiana University. Belth has been an outspoken critic of the practice of "shadow insurance," in which life insurers create subsidiaries to take on some of their liabilities. He calls the practice "a shell game" that puts policyholders and taxpayers at greater risk. (Jeffrey Belth via AP)
This undated photo provided by Jeffrey Belth shows Joseph M. Belth, a professor emeritus of insurance at Indiana University. Belth has been an outspoken critic of the practice of "shadow insurance," in which life insurers create subsidiaries to take on some of their liabilities. He calls the practice "a shell game" that puts policyholders and taxpayers at greater risk. (Jeffrey Belth via AP) This undated photo provided by Jeffrey Belth shows Joseph M. Belth, a professor emeritus of insurance at Indiana University. Belth has been an outspoken critic of the practice of "shadow insurance," in which life insurers create subsidiaries to take on some of their liabilities. He calls the practice "a shell game" that puts policyholders and taxpayers at greater risk. (Jeffrey Belth via AP)

By Associated Press 5 min read

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.

In 2013, then-New York insurance regulator Benjamin Lawsky warned that the arrangements amounted to “financial alchemy” and were reminiscent of practices that contributed to the 2008 financial meltdown.

But 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.

“I think that the industry is headed for serious trouble with this,” said Joseph M. Belth, a professor emeritus of insurance at Indiana University, who calls the practice “a shell game.”