NCOIL EMERGING ISSUES ALERT: FINITE REINSURANCE ...



NCOIL EMERGING ISSUES ALERT: FINITE REINSURANCE—“BROKERGATE” WILL PALE IN COMPARISON March 28, 2005

 

This is the first in a series of updates on emerging insurance issues, a new NCOIL initiative to educate and inform legislators.

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FINITE REINSURANCE—Regulators, attorneys general, and the Securities Exchange Commission (SEC) are currently investigating so-called "finite" or "finite risk" insurance and reinsurance products. 

In general, insurers frequently buy finite risk reinsurance in order to cover the cost of future claims generated from policies that the insurers have already sold.

In finite risk agreement, the policyholder pays a premium for coverage much like a traditional insurance contract, but also commits to reimburse the insurer for any loss paid under the agreement. . . . A company may buy such a product to “smooth” losses over time – to redistribute a loss in one year over several subsequent years. Under current accounting rules, the policyholder probably should account for the transaction as if it were a loan from the insurer. However, with carefully crafted contracts that closely resemble traditional insurance agreements, some policyholders feel justified in – or at least emboldened to – account for the transaction as if it were traditional insurance.(Exerpt, Advisen QuickNote: Finite Insurance and Reinsurance: An Advisen Primer, 3/15/05)

 

The investigations focus on

• contractual agreements that pass for insurance coverage, but violate one or more of the basic principles of insurance

• insurance and reinsurance contracts where little or no actual risk is transferred, so designated as "finite risk" 

• companies that use these and similar agreements to disguise financial problems

• certain recent insurance company failures where finite risk reinsurance agreements – between insurance companies and reinsurers – have been involved

• American International Group (AIG), CNA, Ace Ltd., Platinum Underwriters Holdings Ltd., MBIA Inc., St. Paul Travelers Cos., Swiss Re, Zurich Financial Services Group, and Berkshire Hathaway Inc.'s subsidiary General Re Corp.

 

Foreign regulators have been quoted as saying that many regulators were “asleep at the wheel” regarding these products.  The SEC reportedly does not necessarily agree with this statement, but has expressed great concern over the issue.  The National Association of Insurance Commissioners (NAIC) is also deeply concerned with finite risk transactions and has held hearings regarding the use of these products.  At the NAIC March spring meeting, an insurance commissioner said that this issue may “make the broker disclosure issue pale in comparison.”   AIG CEO “Hank” Greenberg’s resignation is attributed in part to the investigation of AIG’s use of finite insurance and reinsurance allegedly in order to cover up deficiencies in AIG loss reserves.

 

Related items that offer background on the issue include:

• an Advisen primer on finite reinsurance, which explains the products and gives examples of these transactions

• a March 16 Insurance Newscast article regarding the Greenberg resignation

• a March 22 BestWire article on AIG/finite reinsurance investigations

• a March 28 BestWeek article regarding the issue (page four)

 

Please contact the NCOIL National Office at 518-687-0178 should you be interested in receiving these materials.

The NCOIL International Insurance Issues Committee will address finite insurance and reinsurance issues at its July 8 meeting in Newport, Rhode Island.  Please contact the NCOIL for further information.

 

 

 

  

 

k:/ncoil/2005/2004716

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