Job Growth vs. Risk – States Loosen Insurance Regs

States desperate to create jobs and stimulate their economies may be taking on more future risk than is reasonable in the name of short term gains.

As reported in The New York Times on Sunday on May 8 (in an article by Mary Williams Walsh and Louise Story), several states have enacted legislation to allow companies to set up special insurance subsidiaries called captives.  These subsidiaries are less regulated, and have lower requirements for cash reserves.

From the point of view of states looking for solutions to a stagnant economy and high unemployment, these captives seem great.  These companies bring jobs to the state.  And not just any jobs – well-paid white collar jobs: actuaries, finacial analysts, accountants.  And higher paid workers will pay more in taxes. It is a very tempting situation for struggling state governments.

The parent insurance companies also see tremendous short term gains from setting up these captives.  As reported in the Times article, “Aetna recently used a subsidiary in Vermont to refinance a block of health insurance policies, reaping $150 million in savings, according to its chief financial officer, Joseph Zubretsky.”

So what’s the problem?  Critics point out that the lack of regulation feels uncomfortably similar to the sub-prime mortgage industry that led to the financial crisis.  By having a lower threshold for cash reserves for these insurance company subsidiaries, they risk not having enough money on hand to pay out claims, if need be.

It should be a priority of state governments to grow their economies and set up the conditions for job growth in the private sector.  But perhaps the way to do that is not by encouraging companies to take on undue risk, and possibly creating yet another bubble, that will inevitably burst.