1. in 2010,Gen Re agreed to pay $US31.7 million ($35m) to settle charges brought by the US Securities and Exchange Commission for its role in fraudulent accounting practices in 2000 and 2001 at insurers American International Group and Prudential Financial.
2. Gen Re arranged to sell financial products or "sham reinsurance transactions" to AIG and Prudential in 2000 and 2001 "for the sole purpose of enabling those companies to manipulate their accounting results and mislead investors".
PROCESS AND CLAUSES
1.The process is akin to renting balance sheets to cash-strapped insurers for risk-free fee.
2. The policy offer to pay money to the insurer in certain circumstances (with a side letter).
3. Buyers would record in their accounts as a reinsurance recovery. On the other side, the sellers got a fee and claimed a tax deduction.
4. The side letter comes with a clause not apparent to most staffs but maybe to eagle-eyed auditor, that no claim would actually be made on the reinsurance policy.
EARTHQUAKE CLAUSE IN FINANCIAL REINSURANCE POLICIES
1. National Indemnity issued a financial reinsurance policy to FAI Insurance.
2. Combined with other reinsurance policies, FAI Insurance move up its annual result from a $50 million loss to an $8.6 million pre-tax profit.
3. HIH acquired FAI Insurance and subsequently collapsed.
4. The policy issued contained an "earthquake clause", which promised to pay an extra $30m if Australia was hit by one or more earthquakes, each with a damage bill of $5bn or more, during the life of the policy.
5. Given the nearest event was the Newcastle earthquake of 1997 with a total bill of $1.7bn, the likelihood of such events (earthquake with dmg bil of >$5bn) was almost zero.
6. National Indemnity merely had to pay back $55m in premiums to HIH's liquidator McGrath Nicol.
VIEWS
1. Although the policy was never ruled illegal, policy seems questionable due to its likelihood of event to trigger the payout.
2. To qualify as real reinsurance, the risk of payout was 10%. The actual risk of payout (earthquake with dmg bil of >$5b) was only between 2.2 and 3 per cent.
3. The policy contained specific artifice to make it look as though the reinsurer was taking a sufficient level of risk (Payout of $30m).
