Expert Warns of Further Finite Risk Lawsuits

posted on:
July 22, 2005

author:
Staff

Auditors, actuaries, consultants and investment banks will be among the growing number of companies named in finite risk lawsuits, according to a leading provider of strategic information services to the commercial insurance industry.

David K. Bradford, Executive Vice President, Editor-in-Chief and co-founder of Advisen Ltd. told locals at seminar on Finite Insurance and Reinsurance Whats Behind the Investigation that while there has been a lull in recent weeks, the number of lawsuits will rise and all companies that have touched such agreements have the potential of getting dragged in.

Companies already named or notified that they will be named in finite re related lawsuits in the US and Australia include AIG, Deloitte and Touche, General Re, Guy Carpenter, Fortress Re, Millman, Merrill Lynch, Morgan Stanley, National Indemnity and PWC.

Guy Carpenter is the first reinsurance intermediary to be pulled into the fray alongside auditors, consultants such as Milliman and investment banks such as Morgan Stanley.

The breadth of the litigation and regulatory action is potentially quite vast and will draw a lot of different type players into this depending on how aggressively the regulators and litigators pursue this, Mr. Bradford said.
He also expects more companies to join the growing list of those that have already restated their earnings. Companies involved in finite risk agreements will increasingly ask to have the deals unwound and even if such products are not outright forbidden by new regulations, buyers will be reluctant to enter into such agreement for fear of ending up under the regulatory spotlight.

The impact is going to be a loss of revenues associated with these products, Mr. Bradford said adding that while it is difficult to forecast the real impact, Hannover Re has offered some insight with reports that its earnings from finite re products were down 32 percent in the first quarter of 2005.

That is big, big drop so we will definitely lose revenues in the reinsurance and insurance industries that had been going to these products, Mr. Bradford said adding that the industry will lose some key risk financing tools in the process. It is too early to say to what degree taking away these products will it destabilise earnings in the insurance industry.

Advisen is concerned that the probes will spill over into related ART products which may look like finite re agreements but serve a different purpose. These products include environmental type covers that are popular in real estate transactions to cap the liabilities of the buyer of a piece of property if there is suspected environmental problem. Representations on warranties insurance which are used extensively in merger and acquisition situations could end up in the scrap heap because it looks like finite risk.

Mr. Bradford expects to see a growing number of criminals indictments and convictions especially since a number of companies have been served with grand jury subpoenas which are usually the first step in a criminal investigation.
Rather than use the traditional risk evaluation process of a ten percent chance of ten percent loss rule to determine whether there is enough risk to qualify as a reinsurance agreement or insurance agreement, the SEC is instead looking at the intent of this agreement.

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