Companies Hold Differing Views on Value of Reinsurance
While high-profile insurers are using different accounting
treatments to value reinsurance, the National Association of
Insurance Commissioners (NAIC) is pushing for improved disclosure
requirements to avoid misuse.
Since American International Group Inc. restated its earnings by
$3.9 billion in May, investigators have been taking a sharp look at
how certain insurers account for a type of reinsurance that can be
abused to hide losses or inflate reserves. AIG is accused of
misusing finite reinsurance transactions to boost its financial
statements rather than transferring actual risk. U.S. prosecutors
have sent more than a dozen subpoenas since last year, Bloomberg
More recently, the Wall Street Journal has raised questions about
three contracts signed last year by Tennessee life insurer
UnumProvident and property-and-casualty company National Indemnity.
Both companies accounted for the contracts differently, a practice
called unusual by insurance regulators and experts who spoke to the
The NAIC, which helps state regulators develop and coordinate
insurance rules, says that in the case of UnumProvident and National
Indemnity, differing accounting guidelines should not result in one
party treating a contract as risk-transfer reinsurance and the other
recording it as a low- or no-risk deposit transaction.
But that is exactly what happened – Unum treated the contracts as
reinsurance contracts, with the aim of transferring risk of losses
to National Indemnity. National Indemnity recorded the contracts as
if Unum had simply deposited funds with the insurer so that the
money could be used to pay Unum's claims. National Indemnity, based
in Omaha, Neb., declined comment, but state regulators have
questioned the company about the differing accounting treatments,
the Journal reported.
"The business purpose of this transaction was to provide
protection above our established reserve levels in the event of an
adverse risk," Jim Sabourin, a Unum spokesman, told the newspaper.
"The company's accounting for this reinsurance transaction was
subjected to rigorous accounting and regulatory review." The outside
auditor, Ernst & Young, and Massachusetts insurance regulators,
which oversee one of the Unum units involved, approved the
The NAIC earlier this month announced that it supports improved
disclosure requirements for insurers that use finite reinsurance,
which has limited risk transfer features.
The NAIC calls for insurers to report to state insurance
regulators any finite reinsurance agreement that alters
policyholders' surplus by more than 3 percent, or that represents
more than 3 percent of ceded premium or losses. To improve
transparency, the NAIC also calls for reporting more information on
contract terms, and a signed statement by the insurer's CFO and CEO
that no side agreements exist and that legitimate risk has been
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