Financial Reinsurance - Different Accounting Regimes

Different Accounting Regimes

Financial reinsurance is generally intended to impact the regulatory balance sheet on the premise that that balance sheet provides a distorted view of a company's solvency otherwise. Many financial reinsurance transactions, particularly for life insurers, have little impact on GAAP accounts and shareholder-reported profits.

Over the 2004-2006 period a number of financial or finite reinsurance transactions attracted regulatory scrutiny, notably from New York Attorney General Eliot Spitzer, due to the concern that their primary result was to distort and manage accounting presentation rather than to transfer risk. In particular, a transaction between AIG and General Re through which the former buttressed its reserves was identified as transferring insufficient risk, and this review led to management changes at both companies. Accountants, regulators and other constituencies proposed a variety of tests for such transactions.