New York Superintendent of Financial Services Benjamin Lawsky has brought his criticism of so-called "shadow insurance" (through which life insurers set up reinsurance captives to divert reserves to jurisdictions with less stringent regulatory requirements) to the U.S. Senate Committee on Banking, Housing, and Urban Affairs. In his recent letter to Senator Sherrod Brown, Ranking Member of the Committee, Lawsky called on regulators to address what he considers regulatory arbitrage. 

Lawsky pointed to the findings of a 2013 DFS investigation of these transactions and referred to his efforts to have the National Association of Insurance Commissioners (NAIC) prohibit these transactions. The NAIC instead adopted a system of principle based reserving ("PBR"), which permits insurers to adopt their own company models for reserving, rather than having to use a mandated formula. Many state regulators believe that PBR will eliminate, or minimize the use of captive transactions. Lawsky also opposes PBR and prefers the existing formula method required in New York. The life insurance industry has maintained that it will continue to use captives even with the advent of PBR. 

Senator Sherrod Brown recently characterized these transactions as an emerging risk for state and federal regulators to address. This issue is most likely not over.