US insurance body in hunt for (fraudulent finite reinsurance) evidence

By Ellen Kelleher in New York and Andrea Felsted in London
Financial Times
December 1, 2004

Regulators in the US are struggling to find evidence to advance their investigation into finite reinsurance, a product they fear is used widely by companies and insurers inappropriately to smooth earnings.

The difficulty is that it is almost impossible to determine whether finite reinsurance contracts are transferring the appropriate amount of risk even under close inspection, according to a lawyer at the Securities and Exchange Commission who is close to the investigation.

"On paper, there is nothing about these policies to suggest they are anything other than real insurance. You have to dig really deep to determine whether there is risk being transferred and the product is appropriate insurance," he said.

The SEC launched an investigation into finite reinsurance last year after AIG, the world's biggest insurer, came under scrutiny for dealings with Brightpoint, a small telecommunications company that was accused of accounting fraud involving one of these policies and settled. The examination has gained traction in recent weeks as regulators scrutinise unfair practices in the insurance industry.

The SEC is working with Eliot Spitzer, the New York state attorney-general, on the matter. However, people close to the situation say the SEC is taking the lead and efforts by Mr Spitzer's office are flagging because he is preoccupied by his probe on corruption and bid rigging in the insurance broking business. "He already has one Falluja-style battle going on," a spokesman in his office said.

SEC lawyers are also examining whether insurers were inappropriately requiring companies to buy additional insurance policies in exchange for paying claims in dispute. Scores of subpoenas have been sent to insurers including Ace, St Paul Travelers and Swiss Re.

Regulators in Washington scored a victory last week when AIG agreed to allow an outside consultant to examine its books as part of its settlement of issues arising from its transactions with Brightpoint and others.

Finite reinsurance, which is also called non-traditional or loss-mitigation insurance, is typically purchased by companies and insurers looking for protection against the financial impact of future liabilities. The two questions regulators are asking is whether companies should be permitted to account for these contracts as insurance and not as debt and whether these policies cloud earnings' results.

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