U.S. Reinsurers Feel Impact Of Finite Scrutiny

Major U.S. reinsurers offered finite re, but demand is gone

As regulatory investigations and public scrutiny into finite, non-traditional reinsurance transactions continue, major U.S.-based reinsurers that have been offering this product are feeling the consequences–from drying-up demands to costly subpoenas.

According to experts interviewed by National Underwriter, most U.S. reinsurers have been offering products that can broadly be labeled “finite reinsurance,” but many are now seeing the appetite for this product disappear as regulators examine possible accounting abuses associated with finite reinsurance.

For most U.S. reinsurers, though, such finite re deals had made up less than 5 percent in terms of their premiums and number of contracts, said Joseph Sieverling, senior vice president at the Washington, D.C.-based Reinsurance Association of America, who has been discussing the matter with members of his association.

On the other hand, a few companies–such as National Indemnity, which is considered one of the largest U.S. writers of finite re–are seeing a bigger impact as revenues from this product dry up, according to industry participants.

National Indemnity suffered a big drop in net written premiums for its 2005 first quarter, posting $928.36 million, compared to $1.288 billion one year ago. The decline was due to the disappearing demand of finite re products, a market observer said.

One observer, who spoke on the condition of anonymity, even expressed curiosity as to why finite products from National Indemnity have attracted relatively little attention compared to those of General Re, which has been at the center of intense regulatory scrutiny. Both National Indemnity and General Re are subsidiaries of Omaha, Neb.-based Berkshire Hathaway.

National Indemnity declined to comment for this story.

Mr. Sieverling, who prefers to call this product “structured” reinsurance instead of “finite” because of the pejorative meaning now attached to this particular word, agreed that buyers are much more reluctant to enter into these transactions now.

“There has been a significant decrease in the amount of new structured reinsurance products offered this year,” he observed.

“There have been many outstanding structured reinsurance contracts that have expired and not been renewed,” Mr. Sieverling said. “There have also been several commutations of outstanding reinsurance contracts, where they wind up transactions, settle the balances between the parties and cancel the contracts.”

The obvious reason for this lack of appetite for finite re, according to Mr. Sieverling, is the ongoing risk: the regulatory risk, the accounting risk and reputation risk associated with these transactions.

Steven Bolland, president of Gill and Roeser, a New York-based reinsurance brokerage, and John Gilbert, chairman of Holborn Corp. in New York, also acknowledged that many insurance companies now wouldn’t want to touch a finite reinsurance transaction with a 10-foot pole.

Mr. Gilbert commented that now he’s not seeing much activity in this area at all, which is “a shame,” he said, “because it is a valid form of reinsurance if handled correctly, and a vast majority of the placements with all these markets were indeed handled properly.”

Another negative side-effect U.S. reinsurers are facing is the costly expense of complying with industrywide subpoenas related to finite reinsurance. To date, numerous companies have been issued subpoenas or investigative requests from a long list of regulators, starting with New York Attorney General Eliot Spitzer, the U.S. Securities and Exchange Commission, the U.S. Department of Justice, Connecticut Attorney General Richard Blumenthal, state insurance departments and, most recently, the office of the U.S. Attorney for the Southern District of New York.

The reinsurers doing business in the United States that have acknowledged getting subpoenas regarding their finite re products include General Re, Platinum Underwriters, Partner Re, GE Insurance Solutions, XL Reinsurance, Everest Reinsurance, Swiss Re and Endurance Reinsurance Corporation of America.

“I am hearing from my member companies that they are extremely busy trying to comply with various investigations and subpoenas coming from all directions,” commented Mr. Sieverling from RAA. He said RAA is concerned that some subpoenas have been too broad, targeting “everyone” in the industry.

“It’s just that everybody’s piling on at the same time,” he said, “so it’s creating a very high compliance burden on reinsurers to comply with all these and run a business at the same time.”

In terms of legal expenses, generally it’s not unusual for a company to spend more than a million dollars to comply with a single subpoena, said Joseph Monteleone, an insurance attorney at Philadelphia-based law firm Duane Morris LLP.

Mr. Monteleone, who had previously worked as vice president in claims at Hartford Financial Products, said legal expenses can add up quickly because regulators often request documents that go back many years. Further, companies usually need to hire outside legal assistance since these subpoenas are above and beyond what the internal law department is equipped to deal with. Also, companies need legal scrutiny before deciding what documents they must–or should–turn over.

One consolation is that reinsurers might recoup some cost of the investigations through their errors-and-omissions coverage, Mr. Monteleone said, although many E&O policies probably wouldn’t cover them at all.

Flag: In The Spotlight

Defining Finite Reinsurance

There is no “bright-line” definition of what finite or structured reinsurance is. But the Reinsurance Association of America loosely defines it as “a highly structured reinsurance contract where structured elements reduce the amount of risk assumed by reinsurers to the point that it may not meet the accounting requirements of risk transfer.”

Flag: Disappearing Finite Deals

Regulatory Impact On U.S. Reinsurers

Continuing regulatory probes and media coverage of finite re transactions are crushing the demand for the product.

o Most U.S. reinsurers have been offering finite re, but it makes up less than 5 percent in premiums and number of contracts for the majority of U.S. reinsurers, RAA says.

o Complying with regulatory subpoenas can be costly. It’s not unusual for a company to spend more than $1 million to comply with a single subpoena, an insurance attorney says.