Two putative class actions arising from captive life insurance transactions have both been dismissed. In both cases, the Court found that the plaintiff had failed to adequately allege any injury personal to himself, and thus lacked standing to bring a lawsuit.
It is well-known in the captive insurance industry that New York state’s regulators have, for several years, been critical of captive insurance. This includes the New York State Department of Financial Services publication in June 2013 of a 24 page report regarding captive reinsurance transactions in the life insurance industry which was ominously titled Shining a Light on Shadow Insurance. In that report, the New York regulators assert that captive reinsurance arrangements undertaken by large life insurance companies masks financial weakness (and hints that the entire economy is at risk of a financial collapse if a large, interconnected life insurer were to collapse as AIG Financial Products did in 2008).
These transactions are motivated by an effort to manage the gap between economic reserves and statutory reserves (often called XXX/AXXX reserves) approved by the National Association of Insurance Commissions and adopted by a number of states during the 1990s.Academics have divided views on the propriety of these life insurer captive reinsurance transactions. Some (notably Ralph Koijen of the London Business School and Motohiro Yogo of Princeton) essentially agree with the New York State Department of Financial Services, concluding that the potential cost of life insurer insolvencies is underpriced or under-recognized by current models and ratings. Others have concluded that use of the captive reinsurance transaction permits the life insurer to become more economically efficient (thus lowering prices for consumers in a market which is cost-shopped and heavily-driven by premium price) without additional risk of insolvency.
In the first case to be dismissed, the plaintiffs alleged that AXA Equitable Life Insurance Company violated New York statutory insurance law and regulations which prohibited misrepresentation of a life insurer’s financial condition when it used captive reinsurance transactions. Jonathan Ross v. AXA Equitable Life Insurance Co., 2015 WL 4461654 (S.D.N.Y. July 21, 2015). The Plaintiffs further argued that, by misrepresenting its financial condition, AXA was able to obtain higher ratings from the ratings agencies with less capital. The opinion also gives a good summary of the background of current life insurance reserve scenarios, XXX and AXXX statutory reserves, and the captive reinsurance transaction.
However, the Plaintiffs could not articulate any concrete and discrete harm personally suffered. They did not allege that their monthly premiums were higher. They did not alleged that AXA had defaulted in any way. Plaintiffs also did not have any misrepresentation-based allegations; they did not alleged that they relied on the financial statements of AXA in selecting an insurance product or that, had a disclosure of captive reinsurance transactions been made, that they would not have purchased the AXA policies. Because they had suffered no identifiable, immediate, articulable and concrete harm, the Court dismissed the putative class action for lack of standing.
More recently, another judge in the Southern District of New York came to the same conclusion inRobainas v. Metropolitan Life Insurance Co., 2015 WL 5918200 (S.D.N.Y. Oct. 30, 2015). InRobainas, plaintiffs alleged that they had purchased MetLife policies, unaware that MetLife had engaged in captive reinsurance transactions totaling over $1.1 billion. Citing to Ross, the Court rejected similar arguments on the same grounds: the plaintiffs lacked standing under Article III of the United States Constitution to bring this claim because they failed to have any cognizable injury. Indeed, the plaintiffs in Robainas had included an article by Koijen and Yogo as an exhibit to the Complaint which showed that captive reinsurance transactions actually lowered premiums for consumers. Even taking the allegations in a light most favorable to the plaintiffs, the Court was unpersuaded that the plaintiffs had suffered any injury when these transactions made the consumers premiums less expensive. Any risk of future insolvency was deemed too remote or tenuous (note that the Court did not go as far as to say such claims were not “ripe” for adjudication).
Further, although the Robainas plaintiffs specifically alleged violations of state insurance statutes, the Court held that mere violation of a state statute did not create a federal cause of action absent an injury under Article III. Although beyond the scope of this blog post, this is the right result. Similar arguments were presented to the United States Supreme Court in Spokeo v. Robinsr egarding whether Congress could create standing under Article III when the plaintiff suffered no concrete harm. All too often in insurance litigation, plaintiffs complain of theoretical "injuries" which have not yet occurred. Under Article III of the Constitution, these plaintiffs do not have standing to bring a claim until after they have a concrete, demonstrable, and cognizable injury in fact.