Finite Reinsurance Lives: Greenberg

AIG, only a day before Mr. Greenberg's appearance at the conference, announced it had paid $126 million in fees and penalties to the Securities Exchange Commission and Justice Department in connection with the sale of non-traditional finite products because of questions about the amount of risk actually transferred that showed up on balance sheets.

Mr. Greenberg said, "I don't think there's as much of an issue with that as you may think," noting, at one point, that regulators gave their blessing to past finite reinsurance deals in order to keep some ailing insurers afloat.

For years, reinsurance deals have had to have some percentage of risk transfer in them?roughly 10 percent according to accounting literature guidance, he said. They also have timing risk?the risk of paying claims faster than intended?and investment risk. "If you have those three things, you haven't got a problem," he said.

(Generally, finite reinsurance is distinguished from traditional reinsurance in that the reinsurer's risk is more limited than it is in traditional contracts. Finite deals can include profit-sharing features and loss caps, as well as the possibility of refunding some portion of investment income to cedents.)

"I don't think the business will disappear," he said. Noting the approval of past finite deals by some state insurance departments that were "desperately try[ing] to keep some companies alive as long as they could," he said that such deals indicate the presence of "some conflict among the regulators" in their views of finite reinsurance.

Recently, several insurers?most recently Chubb Corporation–and two reinsurers (Swiss Re and Platinum Re) disclosed that they had received subpoenas from the Securities and Exchange Commission and the New York Attorney General's office requesting documentation relating to "loss mitigation and non-traditional insurance" products they sold. Many commentators, including rating agency analysts, have characterized the requests as relating to "finite" or "financial" products, even though the term "finite" is not used in any of the disclosure announcements.

(Among the insurers disclosing subpoenas, bond insurer MBIA is the only one that said information specifically related to reinsurance rather than insurance was requested?and more specifically, that information was requested on a reinsurance contract the company purchased, not that it wrote.)

The settlement finalized by AIG resolved claims that grew out of two non-traditional insurance transactions written by AIG through its Loss Mitigation and Financial Products units.

As for finite reinsurance generally, Mr. Greenberg said at the Lehman Brothers conference: "There's a lot of loose talk about it yet. I hope that be clarified in due course."

Turning to a different reinsurance topic, AIG's leader was asked for his view of the future of the "new crop of reinsurers" in Bermuda.

Mr. Greenberg quipped, "Do you spell that C-R-O-P?"

"If you look out five years from now," he predicted, "that group will be very thin."

"Some will be merged. Some will be out of business. But some will exist," he said, noting that while some were "started only to make a quick profit," there are others that are more professional.

Supporting his prediction of the demise of some segment of the group, he noted that most of the start-ups are "thinly structured with infrastructure" in a business that needs adequate claims, underwriting, and actuarial personnel.

"You can't have 15 people come to the location three days a week and fly back to their homes in London or New York. That's hardly the way to run a professional organization," he said.

Turning to other matters, Mr. Greenberg was asked what he liked and didn't like about the asbestos bill that failed last year.

"I didn't like anything about it," he said. "The trust fund idea will never get legs."

The idea that the trial bar, the unions, defendants, and the insurance industry will "march in one direction" on a trust fund is unlikely, he suggested. For insurers, in particular, "How do you allocate [the industry share] among the companies?" he asked, pointing specifically to questions about what to do about foreign insurer and orphan shares.