November 24, 2004

"Finite Risk Reinsurance" background online

Reports are surfacing about state and federal investigations and allegations that well-known industrial companies and insurers may have used "finite risk reinsurance" to distort financial statements. The legality of the "finite risk" or "loss mitigation" transaction does not appear to be in question. What is in controversy is whether or not it was improperly used by the companies purchasing it. Purchasers of such loss mitigation policies include major insurance companies. As early as 2002, some legal analysts expressed concern that it may be used to disguise underreserving for shocks such as 9/11 and was becoming a target for legal and regulatory challenges.

Below are listed some professional analyses available online that provide more detailed information on this arrangement that was developed in the 1990's and surged in popularity after 9/11/2001.

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Swiss Re: ""Finite Risk Insurance -- Alternative risk transfer via finite risk reinsurance: an effective contribution to the stability of the insurance industry"
" (1997) Abstract: "The study concentrates on the needs and interests of primary insurance companies in the non-life area. The first section sheds light on the circumstances which gave rise to the development of finite solutions. This is followed by the study's main focus, ie description and discussion of the most important forms and functions of finite risk reinsurance, and recent developments which have blurred the distinction with traditional forms of reinsurance. The study also assesses the market potential of finite products in the United States, Europe and Asia."

Munich Re: "MUNICH RE ART SOLUTIONS – FINITE RISK REINSURANCE" (2000). From Abstract: "This publication defines the so-called alternative risk transfer methods in a concise manner and describes their origins and development, existing products and solutions and Munich Re’s philosophy in this market segment."

Guy Carpenter: Interview with head of Finite Risk Specialty Unit (date uncertain -- Google cache version)

David Kroegel, "Finite Risk in 2003," PPT Presentation to Casualty Actuarial Society (CAS).

Various authors, various dates, "About ART: Finite Risk," Artemis, "The Alternative Risk Transfer Portal".

ACE Group, "ACE Global Re Expands its Financial Reinsurance Capabilities," (July 2004).

As early as 2002, industry writers wrote about increased demand for finite risk insurance following the shocks of 9/11, contributing to the formation of new entities in Bermuda. Such writers also warned of increasing regultory scrutiny of finite risk insurance following indications that such products may have been used to disguise financial weakness in insurers and underreserving for 9/11 losses. Attys. Geoffery Etherington and Thomas F.X. Hodson, Edwards & Angell LLP, "The tail that wags the dog: Developments in finite reinsurance," Risk Transfer Magazine (2002) (Free registration required for access).

Standard & Poors reported that four insurers "distorted their financial statements by using 'financial risk reinsurance.'" according to Reuters 11/16/04. Latest News and Financial Information | Reuters.com

On November 24, Reuters and the New York Times also reported that American International Group (A.I.G.) agreed to settle federal inquiries into its participation on similar financial transactions. AIG agree to pay about $80 million and accept an independent monitor. While this is expected to resolve the subject of the grand jury investigation pending in Indiana, the presence of an independent monitor inside A.I.G. could turn up other issues.

See "AIG targeted by US Grand Jury, AP reports" Unintended Consequences 10/22/04

Finite insurance has also been a recent subject of inquiry by New York Attorney General Eliot Spitzer. See "Spitzer and SEC investigate "'finite insurance'" Unintended Consequences 11/16/04

DougSimpson.com/blog

Posted by dougsimpson at November 24, 2004 08:13 AM | TrackBack
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