The action came in the wake of concerns that finite reinsurance contracts, rather than being legitimate risk transfers, have been used by companies as an accounting device to paint false financial pictures. Such contracts have been under investigation by the New York Attorney General's Office and the Securities and Exchange Commission.

Joseph Sieverling, vice president of the Washington D.C.-based Reinsurance Association of America, said that “because the circular letter was so broadly drafted, compliance will be difficult.” He said the industry had proposed a disclosure model that was more “prospective in nature.”

He noted that many reinsurance contracts entered into decades ago may still be in effect if losses are still being reported.

Mr. Mills told National Underwriter that he has been meeting with representatives of the primary and secondary insurance industry over the past couple of weeks to discuss compliance issues.

“I wouldnt say there are going to be modifications. Basically they have questions, and if we can clarify them we certainly will,” he said.

Companies will have to undergo a similar process to meet Sarbanes-Oxley requirements in the near future, he added.

In his Circular Letter 8, issued March 29, Mr. Mills requires chief executive officers to attest that there are no side agreements that would affect the loss to parties under the reinsurance contract and that an underwriting file documenting the risk transfer analysis evidencing the proper accounting treatment be available for review.

In addition to his New York role, Mr. Mills also heads up a National Association of Insurance Commissioners task force looking into whether accounting rules should be changed to accommodate concerns about improper accounting for reinsurance arrangements.

Mr. Mills' announcement of the new rule came just a day before the nations largest insurerNew York-based American International Groupadmitted it had mischaracterized various dealings with reinsurers and improperly documented a $500 million reinsurance agreement it provided for General Re.

Reproduced from National Underwriter Edition, April 15, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.