FASB to Examine Insurance Risk Transfer

Finite-risk reinsurance policies, which have figured prominently in AIG's current woes, have finally drawn the attention of the accounting standard...
Stephen TaubApril 8, 2005

The Financial Accounting Standards Board has announced that it will study a controversial insurance product that is at the heart of American International Group’s accounting scandal and subsequent federal probes. FASB will look into when contracts that are structured as insurance policies actually transfer risk from the policies’ buyers, according to The Wall Street Journal.

“We’ve got a specific problem that’s been brought to our attention in which there are allegations that the accounting is not representationally faithful and not comparable,” Katherine Schipper, a member of FASB, told the newspaper. “So we need to craft a solution that addresses that specific set of allegations.”

The Journal pointed out that companies interpret insurance accounting rules in a variety of ways because of a lack of guidance and lax public-disclosure requirements. Indeed, noted the paper, FASB’s current standards don’t even define concepts as basic as “insurance contract” and “insurance risk.”

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Underlying the discussion is the issue of finite-risk reinsurance policies, which in some cases resemble loans. Such policies drew regulatory scrutiny to AIG, which sold them to companies including Brightpoint Inc. Brightpoint subsequently used the policy to boost its financial results.

The Journal reported that FASB’s options will include enhancing disclosure rules, issuing new guidance in a question-and-answer format, and amending one of the key standards on risk transfer in reinsurance contracts, Financial Accounting Standard 113. However, it could take months or years to amend FAS 113 formally, the paper noted.

Meanwhile, the Journal reported that Astral Reinsurance Co. — a small Bermuda-based business used by AIG to “smooth out” its financials — was in fact run by top AIG executives and controlled more than $1.8 billion of the company’s shares in 2001, according to regulatory filings.

Investigators are looking into whether Astral had dealings with two other offshore reinsurers, Richmond Insurance Co. and Barbados-based Union Excess Reinsurance Co., according to the paper.