FSA Launches Consultation On Disclosure Of Financial Reinsurance

by Robin Pilgrim, LawAndTax-News.com, London

13 October 2005

The UK's Financial Services Authority on Tuesday announced that it is proposing new rules that would require greater disclosure by insurers of their use of financial reinsurance.

The FSA is also looking into the use of financial reinsurance contracts by a number of insurers. Financial reinsurance is a term that refers to certain types of reinsurance arrangements. Typically these arrangements are used to improve, or sometimes to smooth, reported profits, or to improve a reported balance sheet position.

David Strachan, the FSA's sector leader for insurance, explained that:

"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. Whilst 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."

He continued:

"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 draft rules and guidance on which the FSA is now consulting are largely based on firms' responses to the FSA. They would require disclosure in insurers' annual regulatory returns about financial reinsurance arrangements and transactions where:

• The credit in the regulatory return does not match the economic value added after taking account of the level of risk transferred; or
• There are specified terms, side-letters or foreseeable contingencies that could make the reinsurance agreement ineffective or reduce its value.

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