SYDNEY, Australia-Two of Australia's largest insurers sought to distance themselves from the world of financial reinsurance last month as the use of such programs is scrutinized at ongoing hearings on the collapse of HIH Insurance Ltd.

QBE Insurance Group Ltd. and Insurance Australia Group Ltd. both say they do not use financial reinsurance products.

The denials were made soon after a witness at the Royal Commission hearing claimed that financial programs structured to defer insurance losses to later reporting periods are rife among Australia's insurers.

Andrew Allison, former treaty manager at Sydney-based GeneralCologne Re Australia Ltd. and now general manager of Sydney-based Copenhagen Reinsurance Co. (Australia), testified that he knew of three "questionable" reinsurance deals placed with GeneralCologne Re, besides one it wrote for FAI Insurance Ltd., which HIH later acquired. FAI's losses led to huge losses for HIH, which was placed in bankruptcy last year.

The Royal Commission had earlier heard that FAI, to boost its June 30, 1998, financial results, bought $65 million Australian ($33.3 million) in reinsurance coverage from GeneralCologne Re in May that year, which was to include a fee for GeneralCologne Re. However, a "side letter" was signed, in which FAI agreed not to make any claims on the policy, so no transfer of risk occurred.

The Royal Commission previously heard testimony regarding a finite risk coverage for FAI that was placed with National Indemnity Co.

The broker that placed the deal acknowledged one of its purposes was to "arrange reinsurance, which would have the effect of allowing (FAI) to bring $40 million Australian ($20.5 million) of reinsurance recoveries on to the profit and loss account for the year end 30 June 1998" (BI, Feb 25).

When asked which companies used similar deals, Mr. Allison wrote their names on a piece of paper and submitted it to the commission.

Commissioner Neville Owen partially suppressed the note, releasing it only to commission staff and the Sydney-based Australian Prudential Regulation Authority, the Australian insurance regulator.

Shortly after Mr. Allison's testimony last month, Sydney-based QBE and IAG both released statements denying they ever used financial reinsurance.

QBE said it issued a statement "to avoid unwarranted speculation," saying its whole-account aggregate stop-loss reinsurance policy programs, in place since 1988 and 1996, were not financial reinsurance. QBE Chief Executive Frank O'Halloran said it was company policy not to enter into arrangements that enabled deferral of insurance losses.

IAG released a similar statement, claiming it "neither has, nor had, any financial reinsurance contracts. IAG is confident it is not one of the companies named." The statement said IAG did have a whole-account aggregate stop-loss policy and that it was approved by APRA and signed off by tax and legal advisers before finalization.

APRA Chief Executive Graeme Thompson, at a separate Federal Senate hearing, said that he did not know of any other insurers using financial reinsurance contracts similar to those used by FAI and that all reinsurance contracts used by Australian insurers would come under closer scrutiny.

"I'm certainly not aware of contracts of that kind," he said.

Mr. Thompson added that reforms to the General Insurance Act 1973, which come into force on July 1, 2002, would impose tougher prudential supervision of all insurers.

"As part of that process, we will be looking closely at reinsurance strategies and programs of all the companies," he said.

In earlier evidence before the HIH commission, HIH's auditor, the Sydney office of accounting firm Arthur Andersen L.L.P., was criticized in a special report prepared by APRA for the commission last year but was not released until APRA inspector David Lombe gave his evidence.

"The auditors may have knowingly involved themselves in verifying accounts which they knew to be false," Mr. Lombe said.

Wayne Martin, counsel assisting the commission, told of a $200 million Australian purchase by HIH Investment Holdings of redeemable FAI shares, which was backdated to purport that FAI was solvent at June 30, 2000.

An Andersen spokesman said the accounting firm would not respond to the allegations until its testimony is called, which is scheduled for April.

Andersen was criticized at the time of the HIH collapse, having signed off HIH's accounts as being solvent just five months before the company collapsed with estimated debts of $5.3 billion Australian ($2.72 billion).