CEOs Must Take Oath On Reinsurance Industry group challenges practicality of new superintendents order
New York Acting Insurance Superintendent Howard Mills announced last week that insurance company chief executives will have to swear that their accounting for reinsurance deals is proper.
His action was questioned by the Insurance Information Institute, an industry-sponsored group, which suggested the rule might be an impractical requirement. But Mr. Mills stuck to his guns, contending that if companies have a problem with the new rule, then they may have internal problems they need to address.
Mr. Mills said the requirement was a "tough, necessary step that will help restore confidence to the regulatory process."
The announcement of the new rule came just a day before the nations largest insurerNew York-based American International Groupadmitted it had mischaracterized various dealings with reinsurers and improperly documented a $500 million reinsurance arrangement it provided for General Re.
Mr. Mills' new regulation took the form of a "circular letter" to the industry, which noted that the department is "concerned about the improper use of finite reinsurance to manipulate financial reporting results."
"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 letter said.
The department "will now require, as part of its examinations of insurers, the chief executive officer to attest, under penalty of perjury, that with respect to cessions under any reinsurance contract, that:
"There are no separate written or oral agreements that would under any circumstances reduce, limit, mitigate or otherwise affect any actual or potential loss to the parties under the reinsurance contract.
"For each such reinsurance contract, the reporting entity has an underwriting file documenting the economic intent of the transaction and the risk-transfer analysis evidencing the proper accounting treatment, which is available for review."
The new rule also requires increased disclosure of finite-risk transactions in the insurers annual statement, including CEOs swearing to the accuracy of the filing.
Robert Hartwig, chief economist and senior vice president at the Insurance Information Institute in New York, said there was general industry agreement that finite reinsurance arrangements need more regulation.
However, he added, for large insurers "there is a question whether as a practical matter a CEO can have detailed knowledge of every reinsurance contract the company enters into."
The regulation, he said, "raises the compliance burden and the financial stakes." Mr. Hartwig said CEOs would now have to spend a significant amount of time on reinsurance, when "in most cases the CEO is not particularly involved."
Mr. Mills, however, said that "any CEO in todays climate, if he has proper internal controls, would not have any problem signing that attestation."
He added that "it all comes down to the CEOs having faith in their internal controls. If they dont have faith, maybe the oral attestation requirement will move them to address those."
Reproduced from National Underwriter Edition, April 1, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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