The Department of Financial Services said so-called "shadow insurance" typically offloads potential claims to a subsidiary, freeing the parent company's own reserves for other uses. However, the insurers would often remain responsible for paying claims if subsidiaries' lesser reserves were used up, according to its report.

The department, which investigated practices of 80 New York-based insurers, declined to name the 17 companies but said it stopped approving similar new arrangements in October 2011. The report didn't cite any examples where policyholder claims went unpaid.

"A key lesson of the financial crisis is that regulators have a responsibility to shine a light on questionable financial practices that shift risk out of sight and into the shadows," Superintendent Benjamin Lawsky said in a prepared statement. "If we let our guard down and ignore this regulatory race to the bottom, taxpayers and insurance policyholders are the ones who could get left holding the bag."