NU Online News Service, May 12, 10:55 a.m. EDT--The National Association of Insurance Commissioners has stepped into the current controversy over the use of finite reinsurance products with proposed new disclosure requirements.

According to a statement released by the NAIC late yesterday afternoon, the latest proposed disclosures would require an insurer to report to state insurance regulators any agreement that has the effect of altering policyholders' surplus by more than 3 percent, or representing more than 3 percent of premium or losses.

"The new disclosure is also designed to identify any reinsurance contract that has been accounted for differently under statutory accounting principles compared to general financial statement purposes," said an NAIC spokesman.

Finite reinsurance has come under scrutiny because of revelations concerning misuse of such transactions by insurers to provide a false financial picture.

An issue arises when the business a company cedes to a reinsurer has virtually no risk attached and amounts to a loan to the reinsurer, which is paid back through claims payments.

In the widely reported American International Group General Re deal AIG allegedly reinsured GenRe in such a risk-free deal in an effort to bolster AIG's loss reserves. Without detailing what was wrong, AIG has admitted the transaction was documented improperly.

Chubb Corp. this week revealed it had been subpoenaed by federal prosecutors in New York regarding use of finite risk. The company said it believed the investigation involves "a number of industry participants."

Such transactions are in violation of Financial Accounting Standards Board requirements that finite transactions involve an actual transfer of risk.

NAIC's new finite insurance scheme also includes additional reporting requirements regarding contract terms and management's intention in entering the contract. The proposal is slated for final approval at the NAIC's summer meeting next month after a 30-day comment period.

The disclosure requirements met with preliminary approval from the NAIC Property and Casualty Reinsurance Study Group, which met Tuesday in Chicago.

Joe Fritsch, director of the Insurance Accounting Policy for the New York Insurance Department, who led the study group, said, "The proposed enhanced disclosure requirements, in addition to an attestation by company management of entities that engage in these transactions, should clarify the overall impact of finite reinsurance on the industry."

While the NAIC grapples with measures to prevent finite reinsurance abuses, its former president urged the states to go slow in their own inquires while the national organization forges a common approach.

Ernst Csiszar, currently president of the Property Casualty Insurers Association of America (PCI) said that finite reinsurance products are legitimate tools and subject to appropriate guidance under both statutory and Generally Accepted Accounting Principles.

"I sincerely hope the NAIC's bureaucratic red tape does not result in the organization missing the mark and lending further fuel to the calls for additional federal regulatory intervention," Mr. Csiszar said.

Special Reports /

NAIC Bares New Finite Rules

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