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Apr 15, 2015 by |

Captive Reinsurance: A Risky Practice that is Spreading to Annuities


The insurance commissioners association has been working on new rules to limit captive reinsurance, and formed a new working group to study why captive reinsurance has now spilled over from life insurance into annuities. The group is led by Nick Gerhart, Iowa’s insurance commissioner. A recent New York Times article discusses Accordia Life and Annuity’s use of captive reinsurance, but notes that many other annuity and insurance companies utilize this practice as well.

The maneuver known as captive reinsurance grew from $11 billion in 2002 to $263 billion in 2012, according to a 2014 Treasure Department report, which listed captive reinsurance as one of the three most important types of risk to financial stability. Captive reinsurance took off after certain reserve requirements were tightened in the early 2000s. Life insurers are required to hold to pay all future claims, but captives are able to hold less. This frees up cash to pay shareholder dividends.

The process occurs when a life insurer sells policies and then packages the long-term obligations into a “captive,” or wholly owned subsidiary. The parent company is no longer responsible for payment, and the captive is said to have reinsured the obligations. The increase in these deals has also led to billions of dollars of unpaid federal taxes.

The practice is now being used for annuities as well as life insurance. An annuity is a type of insurance product often used in retirement planning. Companies that offer annuity policies, such as Genworth Life and Annuity Insurance Company, or Genworth Life Insurance Company, may offer either deferred or fixed annuities.

The website of Genworth Financial, the parent company of Genworth Life and Annuity Insurance Company and Genworth Life Insurance Company describes annuities in the following manner: “You give money to an insurance company and in return they give you a guaranteed stream of income for a specific period of time or even for life. In addition, deferred annuities can guarantee you a rate of interest. Further, one of the biggest advantages deferred annuities offer is that they allow you to accumulate an amount of money while deferring taxes.” Genworth Life and Annuity Insurance Company lists the top reasons for purchasing an annuity as to supplement income from Social Security or pensions, help you accumulate assets for retirement, create predictable guaranteed lifetime income, and cover essential retirement living expenses.

California annuity fraud attorneys urge consumers, especially senior citizens, to be cautious in purchasing annuities. If you have purchased, or are considering purchasing, an annuity or life insurance policy through Genworth Life and Annuity Insurance Company or Genworth Life Insurance Company, please contact Evans Law Firm, Inc. at 415-441-8669 or via email at to determine if an annuity policy is a suitable investment for you.

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