"We, at the department, recognize that finite insurance is a legitimate product [that] protects insurers from interest rate risk and timing risk," she said during a session at the Professional Liability Underwriting Society International Conference here.

She added that if the finite transactions are not properly accounted for, "or there's not an actual transfer of risk, the transactions can distort the underwriting and surplus positions of the insurers entering into them."

Investigations into finite--a term that encompasses a variety of deals in which there are contractual limitations on the amount of risk sellers assume--are still being conducted by the department and the New York attorney general's office.

Reacting to what the department uncovered during its investigations so far, Ms. Samers said that New York regulators have worked with the National Association of Insurance Commissioners to put some uniform requirements for disclosing finite arrangements in place.

The disclosures, in part, stem from a directive issued by the department earlier this year--Circular No. 8--which has since been withdrawn in the interest of having uniformity across the United States.

The circular had proposed that, for the purposes of financial examinations conducted by the department, the chief executive of the company being examined would have to attest that there were no side agreements--agreements that would alter the transfer of risk--in its reinsurance contracts. In addition, it required an underwriting file documenting the "economic intent" of every reinsurance transaction.

The NAIC disclosure rule now requires insurers to file such attestations (from the chief executive officer and chief financial officer) in their annual statements in all 50 states. In addition, they must attest that they are in compliance with statutory accounting.

Ms. Samers said the intent was "to get greater controls out of our licensees and to improve the ability of regulators to see where there are transactions we should be looking at."

She added that while industry participants debate thresholds for transfer of risk--questioning whether 9 percent or 11 percent transfer of risk is appropriate for insurance accounting treatment--the department, in its investigations, is really not dealing with such questions. Instead, "the abuses we've seen are where there are no underwriting files, and it is clear there is no transfer of risk," she said.

A recent study by the American Academy of Actuaries, and a recent survey by the NAIC, produced similar findings. The AAA study found that there is no consistent standard used by insurers to measure the level of risk transfer in their reinsurance contracts. The NAIC confirmed that most companies using finite contracts don't have internal procedures for testing reinsurance contracts for transfer of risk, she said.

"What you see time and time again are problems with corporate governance," she noted. "That's really the lesson to learn from the finite investigations," investigations into broker compensation practices, and increased scrutiny of insurers generally.

At an earlier session, Peter Porrino, who heads the worldwide insurance practice of Ernst & Young in New York, reported that he attends audit committee meetings on a regular basis. "You can't go to an audit committee meeting without someone asking, 'You're not writing any of that finite stuff? You're not buying any of that, are you?'"

Mr. Porrino continued that "finite" gets "confused with fraud," adding that the majority of the restatements so far were frauds involving side agreements.

In the future, however, he predicted more restatements that have nothing to do with fraud. Going forward, "the bigger issue is going to be the transactions that the SEC is looking at today," he said.

Officials at the SEC, he reported, are saying things like, "'I understand this contract is the entire contract--that there are no side agreements or related-party transactions--but it doesn't work.' There isn't enough risk transfer in the way that we look at risk transfer," he reported.

He predicted that future restatements won't be constrained because of side agreements but because of the SEC's view that not enough risk was transferred.

"The abuses we've seen are where there are no underwriting files, and it is clear there is no transfer of risk."

Audrey Samers, Deputy Superintendent

N.Y. Department of Insurance