The case was originally filed in 2007, led by several Ohio public pension funds alleging a sham $500 million finite reinsurance
transaction between Berkshire Hathaway's Gen Re and American International Group Inc.
He was chair of the NAIC Property and Casualty Reinsurance Working Group that adopted additional disclosures for finite reinsurance
and required CEOs and CFOs to attest that the contracts transferred risk.
thus combines a multi-year banking transaction with limited reinsurance coverage and has five distinguishing features: (1) risk transfer and risk financing are combined in a single contract; (2) less underwriting risk is transferred to the reinsurer than under conventional reinsurance; (11) (3) finite risk contracts nearly always cover multi-year periods rather than being annually renewable; (4) investment income on the premiums paid by the primary insurer is explicitly included when determining the price, placing an emphasis on the time value of money not found in conventional reinsurance; and (5) there is usually risk sharing of the ultimate results (positive or negative balance at the end of the contract) between the reinsurer and the buyer.
For example, a buyer may want the seller to represent that the company being acquired is not a party to any finite reinsurance
Garand, former senior vice president and chief underwriter of the company's finite reinsurance
operations in the United States, is still awaiting sentencing.
The five were convicted of 16 counts arising from a conspiracy to create a sham finite reinsurance
arrangement that helped artificially inflate AIG loss reserves by $500 million in the fourth quarter of 2000 and first quarter of 2001.
Nutter: One of the things that happened in December related to finite (risk transactions) is that the Financial Accounting Standards Board announced that it is going to undertake a review of rules related to insurance and reinsurance driven by the finite reinsurance
In a recent report on finite reinsurance
, Fitch Ratings noted that "most arrangements that fall under the finite risk reinsurance umbrella are to lower reported losses or inflate reported surplus," but added that there is also "no simple definition for this complex product." According to the report, there are two basic kinds of finite reinsurance
products: earnings smoothers--where insurers pay premiums in low loss years to reinsurers that repay a portion of those premiums when a loss occurs, allowing the balance sheet to remain smooth--and balance sheet strengtheners--where insurers boost their solvency by giving reinsurers some of their premiums, thereby reducing the capital needed to support the current level of underwritten business.
To an industry slowly recovering from a four-year period of intense regulatory scrutiny, the recent federal jury decision to convict five former senior insurance executives of securities fraud in connection with a finite reinsurance
deal is yet another black eye, experts say.
FASB came up with the proposal while looking into the issue of finite reinsurance
During a joint conference call of the National Association of Insurance Comissioners' Executive and Plenary Committees, the full body of the NAIC has approved enhanced disclosure requirements for insurers that utilize reinsurance with limited risk transfer features, also known as finite reinsurance
. The disclosures adopted for the 2005 annual statement require property/casualty insurers to report to state insurance regulators the contract terms and management objectives of any finite reinsurance
agreement that has the effect of altering policyholders' surplus by more than 3 percent, or representing more than 3 percent of ceded premium or losses.