Insurers Get Closer Scrutiny

Sydney Morning Herald

Wednesday May 4, 2005

Lisa Murray

The prudential regulator plans to tighten the screws on financial reinsurance arrangements, amid investigations both here and in the US into companies that used the deals to falsify their accounts.

The arrangements will come under scrutiny from the Australian Prudential Regulation Authority to ensure they are accounted for correctly. Any suspect deals will need APRA approval.

The move comes as the regulator finalises its investigation into a reinsurance deal entered into by Zurich Financial Services Australia in 2000, which propped up its balance sheet.

Zurich said on Monday it would delay the release of its 2004 results so that it could work out a way to correct the errors in its accounts.

APRA has also begun investigating Berkshire Hathaway subsidiary General Reinsurance Australia, which sold the contract to Zurich's Australian insurance arm. General Re also came under fire for its role in the HIH collapse.

General Re sold a contract to FAI, which boosted its profit result shortly before it was acquired by HIH, contributing to the biggest corporate collapse in Australian history.

APRA's tough new proposals announced yesterday are part of a broader response to recommendations that came from the HIH royal commission.

Under the draft proposals, insurers will need to provide the regulator with a "financial condition report" every year prepared by an approved actuary.

Chief executives and chief financial officers will need to sign off on the financial information that the company gives to the regulator.

On reinsurance, companies will have to provide details on all contracts to show that they are genuine.

If there are questionable contracts, where there is a limited transfer of risk, they will need approval from APRA.

Reinsurance deals that involve no transfer of risk will be treated in the accounts as a "financing contract".

Businesses have until August 5 to comment on the proposals.

"We're broadly in support of what they're suggesting," said QBE's head of business development, Raymond Jones.

© 2005 Sydney Morning Herald

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