N.Y. Officials Said to Approve Multi-Year Reinsurance Contracts

January 23, 2006

New York officials have reportedly reassured the insurance community that, despite concerns over some alleged abuses of finite reinsurance, the use of certain multi-year reinsurance contracts that might be classified as finite reinsurance is acceptable.

U.S. RE reported it received a letter from the New York Insurance Department in response to a request for clarification in light of recent criticisms of the use of reinsurance where no risk was transferred.

Tal P. Piccione, chairman and chief executive officer of U.S. RE, said the department reaffirmed the “legitimate utilization of multi-year, catastrophe, excess-of-loss reinsurance contracts” in response to its inquiry.

“It is not the department’s objectives to prohibit the legitimate utilization of finite risk protections which are transparent in their construction, not entered into primarily for accounting reasons, provide risk transfer and are accounted for in accordance with Statutory and GAAP accounting,” the letter from the department stated, according to Piccione.

Piccione said the clearance is important given the losses reinsurers have suffered the past two years.

“We’re pleased to have the department’s favorable stance on the legitimate use of these contracts because the displacement of reinsurance capacity as a result of both the severity and frequency of hurricane losses in 2004 and 2005 has created an urgent need for sufficient reinsurance and retrocessional capacity,” Piccione maintained.

According to Piccione, it is essential for the market to be able to provide for structured, multi-year reinsurance and retrocessional protections to insurers and reinsurers as was done in the period following Hurricane Andrew in 1992.

The use of finite reinsurance has been under scrutiny since last year when New York Attorney General Eliot Spitzer and the U.S. Securities and Exchange Commission charged that American International Group under its then-CEO, Maurice Greenberg, improperly employed finite risk contracts as part of an accounting trick to bolster earnings rather than transfer risk.

Last March, the New York department issued a circular letter requiring CEOs to attest that the products were being used properly and ordering insurers to meet certain disclosure requirements. “While the department recognizes there are legitimate uses of finite reinsurance (such as the transfer of interest rate risk and of timing risk), these transactions can distort the underwriting and surplus positions of insurers entering into them when there is no actual transfer of risk or the transaction is accounted for improperly,” the March instructional letter stated in explaining its concern.

However, by August, the National Association of Insurance Commissioners had developed its own set of rules governing finite reinsurance reporting in annual financial statements. After that, New York officials decided to withdraw their own rules and adopt the NAIC’s requirement.

Piccione said that U.S. RE’s proprietary multi-year product was first approved by the department in 1994. U.S. RE was worried that since these contracts can be generically classified as finite risk, questions might arise in the minds of customers and others in the industry. So it sought and received a regulatory perspective as to their appropriateness.

“We believe the statement by the New York Insurance Department should encourage insurance and reinsurance professionals to move forward on the deployment of multi-year catastrophe protections that are transparent in the ability to quantify adherence to proper risk transfer and accounting standards,” Piccione stated.

Last week, the Wall Street Journal reported that AIG may be close to a settlement to resolve the allegations surrounding its use of finite reinsurance. The Journal said that former CEO Greenberg is not part of this settlement. Greenberg, who left AIG last March amid the charges, has denied doing anything wrong. AIG has restated past earnings by $500 million to correct for accounting mistakes. Greenberg has argued those restatements were unnecessary.

Source: US RE

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