CT Blue

This morning’s Times informs us that various states are now letting corporations and insurance companies create “captive insurance companies” within their borders. These companies serve as devices through which corporations and insurance companies can evade regulatory requirements. In the case of the insurance companies, they can evade requirements that they meet certain reserve thresholds, meaning that they can avoid the obligation to actually have the money to pay claims if a lot of bad things happen at once. In essence, these companies are openly engaging in a fraud on the public. Instead of disclosing actual reserves, they disclose the fact that their obligations to their policyholders are insured by captive company X. Captive company X, having been set up in State Y, has no legal obligation to disclose its financial condition, yet the insurance company is allowed to use the assurance that company X will come through as proof that it is retaining sufficient reserves, even though everyone knows that in a crunch, there will be no money there. The actual money that would otherwise have been held in reserve is now free to be paid out in dividends, or more likely, drained into the pockets of the insurance company executives. This is proven by the massive amounts of money the insurance companies claim to “save” by buying insurance from themselves.

If you or I pulled off such an openly fraudulent transaction, we’d be put in jail, but if a corporation does it everyone pretends not to notice. There is, after all, no legitimate reason to form these companies. In the case of the insurance companies, the scam is made easier by the fact that, for a reason that does not exist, insurance companies are not subject to federal regulation. The states can therefore engage in a race to the bottom, which they are now doing with gusto, enabling these fraudsters so they can get a few crumbs off the table. Already, according to the Times, the crumbs are getting tinier, as the insurance giants play one state off against another to the point where some of them are allowing this criminal activity for practically no charge. In this the states are behaving like typical corrupt politicians, who are so often bought off for so little, considering the benefits obtained by those who buy them off.

This scam, I believe, could be easily stopped. Given the current group of Bozos running the House, it’s unlikely that the federal government would step in, even if it could do so. The states, however, retain the right to regulate insurance companies, and it would be easy enough for insurance regulators in the bigger states, say California, New York and Illinois, to forbid any insurance company using captive companies from underwriting insurance within its borders. Don’t look for Connecticut to take action. The article points put that Connecticut has just passed a law enabling captives, so we’ll be getting crumbs too, until the time comes for the inevitable bailout.