Tom Gober is a forensic accountant and Certified Fraud Examiner with over 30 years of experience. He contacted us last week after reading an article referencing Truth in Accounting in The New York Times. He said he was “delighted to see the degree to which your team dives into accounting issues of monumental proportion,” and invited us to learn more about insurance industry practices that he believes pose significant risks.
Gober’s concerns include how the concept of “captive” insurance has broadened to allow insurance companies as well as large non-insurance companies to establish their own captive insurance company. He believes many insurers have entered into complex reinsurance transactions with their opaque “captive” companies, making their own books look good by moving more liabilities than assets into the captive. He is concerned that regulators are not enforcing regulations to the contrary. He believes things are so bad, much of the industry is already insolvent.
We are interested in Gober’s concerns for (at least) three reasons.
- We care about truthful accounting in general, not just in government.
- Government is exposed to risk, if his assertions are accurate. For example, state governments have guaranty funds for insurance company insolvencies.
- There is a growing pension risk transfer market, where pension plans pay insurance companies to assume their liabilities. How many public pension plans are doing this? Does this practice help public pension plans look better, with unchanged or even higher risks for taxpayers? Insurer transactions with their captives could be facilitating this process.
Speaking of curious accounting, consider the question – who do you think sets the accounting standards that apply to these insurance guaranty funds – funds that pose risk for taxpayers?
It isn’t FASB. It isn’t even GASB.
Consider this rather harrowing language from the auditor’s letter on the financial statements for the Illinois Insurance Guaranty Fund:
“… The Guaranty Fund prepared these financial statements using accounting principles approved by the Illinois Department of Insurance, which differ from US generally accepted accounting principles. Accordingly, the financial statements referred to above present only the General Operating Account of the Guaranty Fund are not intended to present fairly the financial position of the Guaranty fund as of December 31, 2015 and 2014, or the changes in its financial position or its cash flows for the years then ended, in conformity with US generally accepted accounting principles.”
Here are some snippets from an article quoting Gober from 2011, and below that, a comment letter he wrote in 2016.
Mary Williams Walsh and Louise Story, “Seeking Business, States Loosen Insurance Rules,” The New York Times (2011)
… Roughly 30 states have passed some type of law to allow companies to set up special insurance subsidiaries called captives, which can conduct Bermuda-style financial wizardry right in a policyholder’s own backyard.
… Captives provide insurance to their parent companies, and the term originally referred to subsidiaries set up by any large company to insure the company’s own risks.
… Now some states make it just as easy. And they have broadened the definition of captives so that even insurance companies can create them.
… This has given rise to concern that a shadow insurance industry is emerging, with less regulation and more potential debt than policyholders know, raising the possibility that some companies will find themselves without enough money to pay future claims.
… The downside, though, is that the states are offering a refuge from other states’ insurance rules, especially the all-important ones requiring companies to have sufficient reserves. California, for one, has already chosen not to try to lure such businesses.
… Perhaps more important, Vermont redefined the term “captive” to include subsidiaries of insurance companies.
… “It is no longer ‘captive’ insurance,” said Thomas D. Gober, a financial fraud examiner who specializes in complex reinsurance transactions. “It’s now billions of dollars from all over the country, yet it’s still being regulated lightly, as if it’s captive.”
Thomas Gober, “Position: Do Not Approve The Latest Version of the Credit For Reinsurance Draft” (2016)
… Let me begin by saying that thirty-one years of education, training and professional experience has uniquely prepared me to educate others on an explosive problem within the insurance industry known as “captive reinsurance” and their bizarre practice of carrying Non-Assets as “other securities.”
… In other words, the domino chains which were once limited to internal exposures contained within one troubled for-profit life insurance group are now lined up in such a way that the dominos have breached that firewall and now span the country, from Vermont to Delaware to South Carolina to Iowa and beyond.
… Furthermore, these “captive reinsurance” transactions are enabling the companies to snatch “profits” from their own company’s tomorrow for the purpose of enriching investors today – not to store them safely for future death claims. Once the future profits have been taken and spent, the companies hold massive blocks of life policies with NO HOPE of any future but the payment of death claims.
… Sadly, because of the secrecy of these captives that file no public financial statements, the policyholders can’t see the true nature of how they are being abused.