Analysts Weigh In On Finite Reinsurance

By Jim Connolly

With all the scrutiny that finite reinsurance is coming under in the property-casualty business, analysts are saying that there is less likelihood for its being misused by life insurers.

Finite reinsurance is a use of reinsurance to protect insurers from interest rate and timing risks. When used improperly, capital and income from companies can be manipulated.

On March 30, American International Group, New York, said in a statement that it has concluded that a finite reinsurance transaction with General Re was “improper and, in light of the lack of evidence of risk transfer, these transactions should not have been recorded as insurance.” An adjustment will reduce reserves for losses and loss expenses by $250 million and increase other liabilities by $245 million.

Speaking of finite reinsurance, in general, Steven Schwartz, an analyst with Raymond James in Chicago, notes that “there is nothing wrong with it as long as there is a real risk transfer. It is being made to sound like its evil and it isnt.”

Julie Burke, managing director with Fitch Ratings, Chicago, says she does not believe that the same problems are as likely to occur among life insurers as among property-casualty companies.

One reason, Burke explains, is that such transactions are more prevalent in the property-casualty part of the insurance business. It enhances GAAP accounting results more for p-c companies than for life insurers, she says, and for p-c companies there is more of an opportunity for regulatory arbitrage by using offshore transactions.

While life insurers have reinsured term business impacted by the Valuation of Life Insurance model regulation, known as Guideline Triple-X, Burke explains that there is still not the same impact on GAAP results as there would be for property-casualty transactions.

As a result of concern over how these transactions are used, Burke says there probably will be new requirements for more disclosure regarding these contracts.

Indeed, on March 29, acting New York Insurance Superintendent Howard Mills announced that the department will require insurers chief executive officers to attest under oath that all reinsurance contracts they enter into contain documentation as to the transactions economic intent and a risk transfer analysis, in addition to a statement indicating that neither written nor oral agreements are in effect that would potentially alter a reinsurance contracts terms.

The department maintains that this will assist in verifying that the correct accounting treatment is being utilized by insurers entering into finite reinsurance contracts.


Reproduced from National Underwriter Edition, April 1, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.