Fitch Releases Special Report on Finite Risk Reinsurance.

NEW YORK -- Fitch Ratings today released a special report on finite risk reinsurance.

Fitch has been very vocal in the past about its reservations with finite risk reinsurance. Fitch's analytical practice has generally been to reverse the impact of these arrangements when conducting ratings reviews of insurance companies who are buyers. Although some degree of risk transfer is included in these arrangements, their primary purpose is not true risk transfer in the traditional sense but financial statement enhancement.

In the special report, Fitch shares its thoughts and analysis on this product group. The group of financial cover insurance products that constitutes finite risk reinsurance is defined. Fitch explains what needs to be present and what needs to be absent to differentiate a traditional reinsurance arrangement from a finite risk reinsurance arrangement. The various types of finite risk reinsurance offerings are also described. Additionally, Fitch discusses past examples of where it has 'backed out' the accounting benefits of finite risk reinsurance in the rating process and how this affected the rating decision.

All of these areas are presented to support Fitch's long-standing perception that finite risk reinsurance has been prone to aggressive usage. The primary purchase incentive has been to lower losses and mimic loss reserve discounting. With the noted investigations launched by the NYAG office and SEC, the operational risks associated with regulatory, accounting body, and prosecutorial involvement are now real. The potential elimination, and probably more importantly, the unwinding of finite risk reinsurance arrangements could have material effects on both the sellers and buyers of the product.