An issue arises when the business a company cedes to a reinsurer has virtually no risk attached and amounts to a loan to the reinsurer, which is paid back through claims payments.

In the widely reported American International Group General Re deal AIG allegedly reinsured GenRe in such a risk-free deal in an effort to bolster AIG's loss reserves. Without detailing what was wrong, AIG has admitted the transaction was documented improperly.

Chubb Corp. this week revealed it had been subpoenaed by federal prosecutors in New York regarding use of finite risk. The company said it believed the investigation involves "a number of industry participants."

Such transactions are in violation of Financial Accounting Standards Board requirements that finite transactions involve an actual transfer of risk.

NAIC's new finite insurance scheme also includes additional reporting requirements regarding contract terms and management's intention in entering the contract. The proposal is slated for final approval at the NAIC's summer meeting next month after a 30-day comment period.

The disclosure requirements met with preliminary approval from the NAIC Property and Casualty Reinsurance Study Group, which met Tuesday in Chicago.

Joe Fritsch, director of the Insurance Accounting Policy for the New York Insurance Department, who led the study group, said, "The proposed enhanced disclosure requirements, in addition to an attestation by company management of entities that engage in these transactions, should clarify the overall impact of finite reinsurance on the industry."

While the NAIC grapples with measures to prevent finite reinsurance abuses, its former president urged the states to go slow in their own inquires while the national organization forges a common approach.

Ernst Csiszar, currently president of the Property Casualty Insurers Association of America (PCI) said that finite reinsurance products are legitimate tools and subject to appropriate guidance under both statutory and Generally Accepted Accounting Principles.

"I sincerely hope the NAIC's bureaucratic red tape does not result in the organization missing the mark and lending further fuel to the calls for additional federal regulatory intervention," Mr. Csiszar said.