NY - CEOs Must Take Oath On Reinsurance
By Daniel Hays
National Underwriter News
March 30, 2005
Insurance company chief executives will have to swear that their accounting for reinsurance deals is honest, New York Acting Insurance Superintendent Howard Mills announced yesterday.
Mr. Mills said the requirement was a "tough necessary step that will help restore confidence to the regulatory process"--a statement underscored by today's admission by American International Group that it had mischaracterized various dealings with reinsurers and had improperly documented a $500 million reinsurance arrangement it provided for Gen Re.
Mr. Mills' imposition of the 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 insurer's annual statement, including CEO's swearing to the accuracy of the filing.
AIG--in addition to regulatory scrutiny by the New York Attorney General's Office and U.S. Securities and Exchange Commission--is undergoing a regularly scheduled departmental exam, according to Mike Barry, a spokesman for the department. Such exams of companies are normally conducted every three years, he said.