Risk Management

Regulators Propose Finite-Risk Rules

Under the proposal, the part of the transaction that involves transferring risk would be treated as insurance for accounting purposes, while the pa...
Stephen TaubMay 12, 2005

New York insurance regulators have proposed new accounting rules for finite-risk transactions, which could eliminate many of the types of abuses at the center of the American International Group Inc. investigations, according to The Wall Street Journal.

According to the Journal, the New York State Insurance Department presented a discussion draft to a meeting, earlier this week in Chicago, of the National Association of Insurance Commissioners. If these rules were adopted, reported the newspaper, they would apply to insurance-company filings with state insurance departments.

The proposed changes are designed to rein in deals where there is apparently little or no transfer of risk by closing a loophole that allows insurers to choose between insurance and deposit accounting, explained the Journal. Under the proposal, the part of the transaction that involves transferring risk would be treated as insurance for accounting purposes, while the part of the deal that involves financing would be subject to bank-deposit accounting.

“The goal is to match the accounting of significant reinsurance transactions with the economics of what’s happening,” said Mike Moriarty, a director in the New York insurance department, according to the Journal.

Finite risk is not itself illegal: Used correctly, it can help finance executives to manage hard-to-quantify risks, clinch a merger deal, and even produce better-quality earnings.

The New York proposal might also serve as a model for similar changes being examined by the Financial Accounting Standards Board, the Journal added.