Jul27

What Is Captive Reinsurance and What Is Its Role in Universal Life Insurance Fraud?

If you have been following the growing problem surrounding universal life insurance policies and the steep increases affecting some policyholders, you may have come across news articles or legal complaints talking about “captive reinsurance.”

What exactly is captive reinsurance and how does it factor into alleged instances of universal life insurance fraud? Read on for some insight. (To review more basics about universal life insurance, read our guide here. )

Defining Captive Reinsurance

In general business terms, a captive insurance company is created and owned by one or more non-insurance entities to insure their own risks. You can think of it as a form of self-insurance. Captive insurance companies can be formed for many purposes—in fact, they can provide insurance for practically every risk underwritten by a commercial insurer—and, once established, are subject to the same reporting and reserve requirements as commercial insurers, too.

The life insurance industry sometimes uses captive reinsurers to finance reserves required under current regulations. Regulatory laws dictate reserve amounts that insurers must set aside for their term life policies and universal life policies. In some cases—such as when required reserves are viewed as excessive or redundant—life insurers use their captive reinsurers to finance the reserves for their insurance products.

Class Actions Involving Captive Reinsurance

Whereas some universal life insurance-related litigations focus on contract terms as a basis for alleging policy overcharges (read Why Some Policyholders Are Suing Their Universal Life Insurers and More Class Action Lawsuits Challenge Cost of Insurance Charges), others assert that an insurer has raised premiums to compensate for financial troubles caused by the misuse of captive reinsurers or poor investment performance.

For example, captive reinsurance plays a prominent role in the class action suit filed against Banner Life Insurance in the District of Maryland in early 2016. The complaint alleges that Banner Life made COI increases that were improperly driven by the company’s captive reinsurance arrangements and not based on the contract language regarding factors that could justify such increases.

According to the plaintiffs’ law firm, “The complaint alleges that these increases are being implemented ultimately to benefit shareholders and rid Banner of near-term liabilities it has accrued due to its wrongful use of captive reinsurance companies.”

In August 2015, Banner Life sent a letter to policyholders notifying them of steep increases to the cost of insurance, which it attributed to the fact that the company “did not adequately account for future experience,” factors like the number and timing of death claims, investment performance, and the cost to administer policies.

However, the complaint claims that the true reason for the increase was to provide money to cover the company’s near-term liabilities. That money should have been held in reserves, in keeping with state regulations, but the lawsuit alleges that Banner instead pretended to transfer those liabilities to its captive reinsurers while actually using the funds—purportedly millions of dollars—to pay out exorbitant stockholder dividends.

Meanwhile, certain policies were allegedly allowed to deteriorate and lose value without providing the policyholders any warning that their investments were not performing. According to the plaintiffs’ law firm, that left many policyholders with “no choice but to forfeit their policies or allow their cash value to be taken.”

This suit is just one example of how captive reinsurance schemes can potentially impact unsuspecting policyholders.

Vinas & Deluca is working with Rivero Mestre to prosecute cost of insurance increase cases against Principal Life Insurance Company. You can find a copy of the complaint here. If you or someone you love has a policy with Principal and has seen their cost of insurance rates increase dramatically, please give us a call.