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Finite Re Blanks Disclosure and Attestation Has Fishing Expedition Aspects, NAMIC Tells Working Group

INDIANAPOLIS (July 7, 2005)—National Association of Mutual Insurance Companies (NAMIC) comments on proposed new National Association of Insurance Commissioners (NAIC) Annual Statement disclosures and attestation, caution regulators that current standards on risk transfer are indeterminate.

Individual states’ inquiries and a pending Annual Statement blanks item make top management subject to the lack of bright lines and clear distinctions with respect to finite reinsurance agreements, NAMIC’s Financial Regulation Manager William Boyd noted to the NAIC’s Blanks Working Group in comments filed Friday on behalf of NAMIC. What may be unclear to insurers in responding to inquiries and Annual Statement interrogatories is what constitutes economic substance, which seems to be defined as true risk transfer.

States and the NAIC are understandably concerned about reinsurance contracts providing secure regulatory capital, and the NAIC is following several states’ lead in developing disclosure and attestation on insurers’ finite reinsurance agreements. Although abundant finite re agreements that do pass muster are used by companies, regulators want to identify those agreements that may be more for financing purposes than for true risk transfer.

The NAMIC comments responded to proposed new Annual Statement content intended for that purpose.

The proposal before the Blanks Working Group asks CEOs and CFOs to declare what they've taken as credit for reinsurance in financial statements as having economic substance—and to attest to its economic substance. As currently written, the interrogatory and attestation also reach well into the past.

This interrogatory and attestation appear not to cause problems for small companies with quota-share reinsurance agreements--save for the additional labor of completing them--but there may be species of finite re agreements used by medium- and larger-sized companies that do cause problems and, potentially, regulators' demands that contracts be disregarded or diminished with respect to credit for reinsurance.

Another NAIC committee is engaged in amendment of SSAP No. 62 with the intent of making that accounting pronouncement more definitive with respect to what is and is not permissible for what is known as “credit for reinsurance,” that capital that supports losses.

“Those who attest as to the nature of their reinsurance agreements do so therefore without great confidence in some cases,” said Boyd, who suggested that the new interrogatory was in some degree a fishing expedition.

Posted: Thursday, July 07, 2005 12:00:00 AM. Modified: Thursday, July 07, 2005 12:07:56 PM.

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