S&P outlines concerns around finite re

In a new report, rating agency Standard & Poor’s explains its concerns and method for detecting finite reinsurance transactions in the financial information of company’s it analyzes.Finite re, also called financial reinsurance or financial engineering, has come under fire from regulators and other authorities in the U.S. who have objected to their use in “smoothing” the earnings of insurance companies.Rating agencies, including S&P, have joined in the attack on finite re. As the S&P report notes, when finite re first came into vogue in the 1980s, its was more reflective of a traditional insurance product, where a ceding company could share in the profitability of the reinsurance contract in exchange for limiting the potential liability of the reinsurer. However, finite re has evolved in recent years and moved away from risk transfer to become an accounting mechanism which smoothes earnings and/or capital. “Specifically, S&P has noted that some transactions lessen the impact of losses currently with the expectation that in subsequent years, full or substantially full reimbursement will be made under the guise of increased premium levels, additional commissions, higher interest rate levels for funds withheld, or a combination thereof,” the report notes.The rater says in these cases it has adjusted it view of insurer earnings to suit the economic reality underlying these kinds of transactions.