12 April 2015

Those Bermuda Bastards

I think it was Dr. Hemond who said, "If you need a little money, you go to a bank. If you need serious money, you go to an insurance company." Mostly, of course, life companies; the payout risk is somewhat more quantifiably predictable. Causes of death don't change all that much from year to year. Hurricanes, tornados, and faulty autos; not so much. Or very much, depending on how one chooses to parse the English.

Earlier in the week, the NYT ran a story describing how rich people create captive insurance carriers.
Stephen M. Moskowitz, a tax lawyer and certified public accountant in San Francisco who advised the California lawyer, said he also worked with a dentist who set up a captive to insure against a terrorist attack in his dental office.

I thought about musing about how incentive, once again, tops data, but let it go. Very zen of me. But it appears the "Times" was using that story as a loss leader or hors d'oeuvres. Today, we get the entree: life insurance companies, since they get to play 50 states' insurance departments against one another, are playing Russian roulette with your family's security blanket. Once again, those that make the rules get to bend them to their benefit.

In concert with what many, humble self included, have said about banking leading to, and especially after, The Great Recession; banking is supposed to be dull.
The life insurance business is supposed to be dull -- sell policies; collect premiums; salt the money away in the safest sorts of investments, mostly bonds; pay out benefits; and make money along the way by investing surplus assets prudently. No wild bets, no siphoning of assets, no off-the-books maneuvers.

Here, again, we see the side-effect of the over-supply of savings, globally. Interest bearing instruments rise in price, thus lowering the effective interest rate on their coupons. It was just this, still growing, over-supply that led to the Great Recession. Rather than invest in producing assets, which depend on getting the right plant and equipment installed, The Masters of The World chose "risk free" assets. Since they were all chasing the same classes of assets, US Gummint debt mostly, US housing looked like a better yield with little increase in risk. Think of it as arbitrage in reverse: all the Masters fixated on one narrow (in the global sense) class and threw trillions of moolah at it. Even if the Crash never happened, the result would have been about as bad for the Masters: collapsing returns.

Today, with all that moolah chasing Treasuries, the historical class for life insurers, the companies face collapsing returns. Again. So, again, they fiddle the rules. This time with, some, help from the regulators. The piece points to Iowa, and my favorite "Lord of the Flies" whipping boy country, Bermuda.
For years, Iowa has been working to make its capital, Des Moines, an insurance hub, with considerable success. Insurance now accounts for more than 24,000 jobs in and around the city, and for more dollars in the state economy than agriculture.

Just as Bermuda, or at least the rich white ones, decided that tourism was too dull and not rich enough, Iowa's powers that be decided to kowtow to insurance company fiddling. The essence of the fiddle, both with Bermuda and Iowa companies, is to create captives which actually have no moolah, but lots of liability.
One maneuver known as "captive reinsurance" grew to $364 billion in 2012 from $11 billion in 2002, according to a Treasury Department report issued in 2014. The report said captive reinsurance exemplified one of the three most important types of risk to financial stability that emerged last year.

Captives get created as shells, take the liability, while the parent keeps the profit. Nice work.
Putting obligations into a captive and saying they are reinsured is a little like putting dirty laundry into a closet and saying it's being cleaned.

I can't top that one, ya know.

[New York State's superintendent of financial services, Benjamin M. Lawsky] keeps saying that captive structures remind him of the deals that proliferated in the run-up to the financial crisis of 2008. That ended in a giant taxpayer bailout.

Once again we get the fallout from the 1%'s demand of 10% (or so) return on the use of their idle moolah. It doesn't, and hopefully won't (from their point of view), be put to productive use. That's too risky. They just deserve their tithe.

No comments: