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Finite reinsurance market survives, but in a diminished form

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Call it the market that would not die.

The finite market has survived, albeit in modified form, despite numerous regulatory investigations; indictments; restatements; resignations; shareholder lawsuits; and settlements involving insurers, reinsurers, and current and former officials of these companies.

The reason, say observers, is simple: The market fulfills a need.

Genuine risk transfer

The key issue is Financial Accounting Standard 113, which calls for a certain amount of risk transfer to qualify as reinsurance. Absent the risk transfer, such contracts act more like loans and are supposed to be booked as deposits.

But regulators and the insurance industry have not always agreed on what is considered risk transfer, and this has led to numerous problems for the industry.

Investigations have resulted in criminal indictments of former executives at New York-based American International Group Inc. and Stamford, Conn.-based General Reinsurance Corp.

Deals involving finite risk have also prompted the exits of the top officers of AIG, Bermuda-based RenaissanceRe Holdings Ltd. and Max Re Capital Ltd.

Last month, Schaumburg, Ill.-based Zurich American Insurance Co. finalized settlements with 11 states and the District of Columbia, agreeing to pay at least $141.8 million to resolve allegations of bid rigging, price fixing and misuse of finite risk products.

Other companies associated with settlements or fines that involved finite risk have included General Reinsurance U.K. Ltd., a unit of Gen Re; St. Paul, Minn.-based St. Paul Travelers Cos. Inc.; Washington-based Federal National Mortgage Assn.; and Bermuda-based ACE Ltd.

Restatements involving finite risk have included Toronto-based Fairfax Financial Holdings Inc.; Stamford, Conn.-based Odyssey Re Holdings Corp.; and Zug, Switzerland-based Converium Holdings Ltd.

Post-Spitzer regulation

While many in the insurance industry may be happy to see New York Attorney General Eliot Spitzer's move to the governor's mansion, the industry could well be subject to more scrutiny of issues including finite deals by his successor, Andrew Cuomo.

Regulatory pressures have resulted in a drop in the number of overall finite risk transactions, said John Andre, vp, reinsurance and alternative market ratings for Oldwick, N.J.-based A.M. Best Co. Inc.

The trend is most pronounced in cases when there is a question about whether a particular finite risk contract should be accounted for as a deposit rather than insurance. "Those deals are being approached with more skepticism by cedents, and the transaction flow has diminished considerably," said Robert DeRose, assistant vp, reinsurance ratings, at A.M. Best.

Nevertheless, some deals survive.

"There's always going to be people who want or need something other than the traditional market," said Dan Malloy, executive vp at Benfield Inc. in New York, with responsibility for specialty lines, including alternative risk transfer and structured reinsurance. "People always want reinsurance."

"Even if the regulators were to try and get rid of all uses of finite, I think it would be very difficult," said Brian Schneider, director, insurance, at Chicago-based Fitch Ratings. "You'll always see degrees of it here and there to the extent that it's an economic benefit to both parties and doesn't distort economic statements."

Finite reinsurance typically is used to smooth losses over a number of years.