Fitch Reports on Finite Risk Reinsurance; Teleconference for Nov. 17

Fitch Ratings announced that it will hold a teleconference on Wednesday, Nov. 17 at 11:00 a.m. EST (4:00 p.m. GMT) to discuss its report on Finite Risk Reinsurance.

The rating agency noted that it had issued a special report on October 29, 2004 titled “Commercial Property/Casualty Insurance – Impact of New York Attorney General’s Probe.” In the report it pointed out that “finite risk (re)insurance as a business line that may bring further attention – and negative at that – to an industry currently mired in unfavorable scrutiny.” It also said that, given the present focus on the industry, “It may be prudent to explore whether the plethora of prosecutors and regulators now investigating this sector will surface other practices that could result in further actions. Fitch believes the top suspect is finite risk insurance/reinsurance.”

Fitch has previously voiced concerns, “that finite risk reinsurance has been used aggressively by some of its purchasers (and sellers). Not only does Fitch feel that such aggressiveness potentially distorts financial reporting and hampers the analysis process, but it potentially exposes both buyers and sellers to operational risk. In light of the recent investigations into insurance industry practices, the realities of this risk, which has always been real, may now become coming to the surface.

“Finite risk reinsurance encompasses a number of products, some of which can be quite complex,” the bulletin continued. “It is important to mention that not all finite risk products are abusive. To be sure, it is not the finite nature of the arrangements alone that most concerns Fitch. Rather it is the limited risk transfer of the loss involved, and the presence of a financing element to this loss, that leads to Fitch’s concerns that many finite products have a significant debt-like element.”

The complex nature of the products involved frequently makes it difficult to distinguish which finite risk policies are subject to abuse, and which are not. “There are no bright lines to rely on in making this determination,” said Fitch, but it suggested that “this exercise becomes much easier if market participants understand the issues.”

Fitch said the: “Teleconference and report will share with the users of our ratings and services Fitch’s thoughts and analysis on this product group. In the report and on the teleconference Fitch will define the group of products that comprise finite risk reinsurance. Fitch will explain what needs to be present and what needs to be absent to differentiate a traditional reinsurance arrangement from a finite risk reinsurance arrangement. Fitch will also describe the various types of finite risk reinsurance offerings. And, additionally, Fitch will discuss past examples of where Fitch has ‘backed out’ the accounting benefits of finite risk reinsurance in our pro-forma ratings analysis, and how this has impacted past rating actions.

All of these areas will be presented to support Fitch’s long-standing perception that finite risk reinsurance has often been used to dampen underlying economic volatility within reported accounting results. A primary purchase incentive for many has been to lower initial reported losses, and obtain an accounting treatment that mimics loss reserve discounting. The operational risks associated with regulatory, accounting body and prosecutorial involvement are now real. In an extreme scenario, a sharp reduction in use or availability of finite risk reinsurance arrangements could have material effects on both the sellers and buyers of the product.”

Following are the details of the Nov. 17 teleconference:

Domestic Participants should call 888-266-4139 and international participants should dial 706-643-1860. All participants should dial in ten minutes prior to the 11:00 a.m. EST start time and give the title of the call, ‘Fitch Ratings’, or the Conference ID, ‘2254837’. The call leader is Michael Barry.

Call Replay: Interested parties who are not available for the teleconference will be able to hear a replay of the call starting Nov. 17 at 2:00 p.m. EST until Dec. 17, 2004 at 11:00 a.m. EST. For the Replay, Domestic participants should dial 800-642-1687 and international listeners should dial 706-645-9291 and use the pass code ‘2254837’.

The replay of the teleconference also will be archived on the Fitch Ratings web site for one month. Interested parties can find the appropriate link at the ‘Company Events & Online Media’ link which is located under the heading ‘About Fitch’ at ‘www.fitchratings.com’.

The Fitch report, ‘Finite Risk Reinsurance’ will be available on the Fitch Ratings web site at: www.fitchratings.com, beginning at 11:00 a.m. EST Nov. 17. CONTACT: Fitch Ratings Michael Barry, 212-908-0621 Donald Thorpe, 312-606-2353 Kenneth Reed, 212-908-0540 (Media Relations)

Topics Reinsurance