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FSA consulting on finite

The UK Financial Services Authority (FSA) has said it is consulting with the (re)insurance industry on revised rules for the disclosure of finite reinsurance.

The announcement follows a March 2005 request for information from the FSA for firms’ use of the controversial practice, which is used to improve or smooth reported profits, or to improve a company’s reported balance sheet position.

In the US, trail-blazing New York attorney general Eliot Spitzer has led investigations into the practice, filing civil lawsuits against world’s largest insurer AIG among others accusing it of using finite reinsurance to distort its true financial position.

David Strachan, the FSA's sector leader for insurance, observed: “The use of financial reinsurance is an issue that the FSA has been examining for some time. Our research has shown that its use is not widespread. While there can be perfectly legitimate reasons for using financial reinsurance, its use should be properly disclosed. The proposed rules will provide greater clarity about firms' use of financial reinsurance.

“Our work has identified a small number of contracts that warranted further examination. Where we find firms have made improper use of such contracts or not made a full disclosure of financial reinsurance contracts or arrangements, we will take action."

The FSA said that although the use of finite reinsurance by UK firms was “not widespread” it was looking into a “limited number” of cases in liaison with overseas regulators.

Under the regulator’s proposed rules, companies using finite reinsurance would be obliged to disclose its use in their annual regulatory returns where credit in the regulatory return does not match the economic value added after taking account of the level of risk transferred; or where foreseeable contingencies could make the reinsurance agreement ineffective or reduce its value.

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