AIG's Reinsurance Scandal: A Call for Fundamental Changes in the Insurance Industry

AIG's complex reinsurance arrangements have set off a chain reaction of investigations, regulatory scrutiny, and calls for reform in the insurance industry. The New York state Attorney General, Eliot Spitzer, the U.S. Securities and Exchange Commission, and the U.S. Department of Justice are all involved in the probe, which has already led to the firing of at least three high-level AIG executives and the resignation of the company's long-time chairman and CEO, Maurice R. Greenberg. As the investigations expand to include transactions by other companies, the industry is bracing for far-reaching changes.

Key Takeaways:

• AIG's reinsurance scandal is a symptom of a larger problem in the insurance industry, where ethics have taken a backseat to profit.
• The failures that led to the AIG investigations occurred at all levels, from accountants to analysts to executives.
• The current scrutiny of finite reinsurance transactions will likely make buyers of such products think carefully about how they use them.
• Offshore insurance markets are also being impacted, as the focus of Spitzer's investigations will shift to areas where companies and buyers will be more careful about reinsurance arrangements.
• Regulators may shift their emphasis from rate regulation to closer scrutiny of balance sheets.
• The London market spiral, the collapse of the U.S. workers' compensation pool known as Unicover, and Lloyd's problems have all been linked to finite reinsurance issues.
• Regulators may need to develop more sophisticated structures to handle alternative-risk vehicles.
• The reinsurance industry has evolved to the point where straightforward risk transfer is often obscured by complex transactions.
• Companies must provide proper documentation, and regulators must push for transparency to ensure that regulations work effectively.

Statistics:

• $20 million: The amount of RLI's retained catastrophe coverage that was the subject of financing reinsurance coverage in 1993.
• 80%: The proportion of reinsurance deals that may be balance-sheet arrangements with a "sliver of risk" attached.
• 15 years: The number of years Richard Markey spent holding senior management positions with several insurers before becoming a consultant.
• 1999: The year the U.S. workers' compensation pool known as Unicover collapsed.

Sources:

• A. M. Best via COMTEX
• The New York state Attorney General, Eliot Spitzer
• The U.S. Securities and Exchange Commission
• The U.S. Department of Justice
• Frank Cacchione, a member of PA Consulting Group's management group
• Jonathan E. Michael, president and CEO of RLI Corp.
• William G. Passannante, an insurance attorney with Anderson Kill & Olick P.C.
• Richard Markey, a consultant with BusinessEdge Solutions Inc.
• David Pilla, Copyright (C) 2005 by A. M. Best Company, Inc.