States Close In on Finite Reinsurance Disclosure; N.Y. Agrees to Adopt Model

By | June 13, 2005

State insurance regulators moved closer to final adoption of a model finite reinsurance disclosure regulation at the summer meeting of the National Association of Insurance Commissioners in Boston this weekend.

As they did, they expressed the hope that states that have already moved to put their own finite reinsurance rules in place would instead adopt the NAIC language. Following the meeting, New York regulators who had imposed their own new reporting criteria signaled they would abide by the NAIC’s wishes.

The NAIC Property and Casualty Reinsurance Study Group heard testimony from insurers and reinsurers, incorporating some but not all of their requested changes, before approving enhanced disclosure requirements regarding finite reinsurance.

The disclosures would require an insurer to report to state insurance regulators any finite reinsurance agreement that has the effect of altering policyholders’ surplus by more than three percent, or representing more than three percent of ceded premium or losses. The proposal includes additional reporting requirements regarding contract terms and management’s intention in entering the contract to improve transparency.

Joseph Sieverling, representing the Reinsurance Association of America, lost his argument for a five percent materiality threshold instead of the three percent trigger.

The NAIC study group also approved a standard form to be signed by the insurer’s chief executive and chief financial officers attesting that there are no side agreements to the reinsurance contract and that legitimate risk transfer has occurred. Finite reinsurance may involve limited risk transfer.

The issue of how finite reinsurance is used and reported is among the major issues in the ongoing federal and state probes of American International Group. AIG has been accused of misreporting and misusing finite reinsurance transactions not to transfer actual risk but to polish its financial statements. Finite reinsurance has also been raised in investigations of Prudential, Chubb and other firms.

“The proposed enhanced disclosure requirements and the attestation by company management will clarify the overall impact of finite reinsurance on the industry,” said Joe Fritsch, director of insurance accounting policy for the N.Y. Insurance Department and chair of the NAIC study group. “Since this issue is a priority for state insurance regulators, we believe that this approval will allow the enhanced disclosure of these practices to be identified in the NAIC 2005 property and casualty financial statement.”

In moving quickly on these forms, the state commissioners and the industry hope to achieve a coordinated approach to the issue from individual state insurance departments.

“We need to give states a uniform disclosure rule before too many go off on their own,” said Steven Johnson, deputy commissioner for Pennsylvania and member of the group.

Another study group member, Audrey Samers, also of the N.Y department, agreed that the goal is “uniform disclosure.”

As part of the resolution that passed the working group, regulators approved a request offered by Pennsylvania’s Johnson that states be encouraged to refrain from implementing their own finite reinsurance disclosure rules and instead adopt the NAIC proposal. Several states have already announced some form of disclosure requirement.

Insurers and reinsurers, even while pressing for tighter language in the proposal, said they agreed with the desire to move swiftly and encourage coordination among states.

“There is no debate on the big picture here,” Franklin Nutter, RAA president told Insurance Journal after the resolution passed the committee. He praised Johnson’s resolution calling for states to avoid multiple approaches and inquiries on the subject. “What we hope is that this sends a strong message to states to coordinate their activities on this,” Nutter said.

In response, New York regulators indicated a willingness to forego their own regulatory orders in favor of the NAIC.

“This is a good time for us to coordinate with the NAIC,” Howard Mills, N.Y. superintendent of insurance, told Insurance Journal.

Mills said that his department has been trying to clarify its Circular Letter No. 8 with its revised finite reinsurance reporting rules since it was issued in March and that adopting the NAIC language should clear up any confusion.

Massachusetts Insurance Commissioner Julianne Bowler had indicated in March that her department was going to require that the chair of the audit committee for an insurance company sign off on any finite reinsurance contracts, including certifying that there are no informal or side agreements that might affect such reinsurance.

Following the NAIC meeting, Bowler indicated that she does not see it as in conflict with anything the NAIC is recommending.

“If the audit chairs have concerns, they are to contact us, otherwise not,” she added.

Georgia is determined to stick by its current inquiry on finite reinsurance despite the NAIC activity, although Commissioner John Oxendine also told Insurance Journal he would consider using the NAIC language as the basis for legislation he would introduce next January on the subject.

“If that’s true, that would be disappointing,” RAA’s Nutter told Insurance Journal regarding Oxendine’s statement that he would not withdraw his interrogatories.

Several other states that have also indicated they were going to pursue their own finite reinsurance inquiries could not be reached for comment.

In addition, the NAIC Casualty Actuarial Task Force plans to distribute a survey to insurers and actuaries to determine what risk transfer tests are being used for these agreements and what minimum risk transfer requirements industry practitioners currently use.

Meanwhile, a separate NAIC panel is considering whether states should modify the accounting rules in what is known as bifurcation. Under this change, insurers could report the real risk transfer portion of any finite reinsurance agreement, which is sometimes as low as one percent, as insurance, but they would be required to report the rest of the contract as financing. This change, which has met with resistance from the industry and some states, will not be revisited until after results of a survey are submitted in late July.

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