Investigations into Insurance Industry Widens as Ace Ltd. Receives Subpoenas

Strategic Insights -

The Securities and Exchange Commission and the New York attorney general, Eliot Spitzer, have expanded their investigations into the insurance industry, with both agencies subpoenaing documents from Ace Ltd. and AIG Inc. concerning loss-mitigation insurance contracts. These contracts, also known as finite insurance, have been widely used for at least a decade to smooth out volatile earnings. Under these contracts, companies pay premiums, file claims for payment when earnings fall beyond a predetermined range, and record the insurance payments as income, mitigating reported losses.

Key Takeaways:

  • The investigations into the insurance industry are ongoing, with both the Securities and Exchange Commission and the New York attorney general's office subpoenaing documents from Ace Ltd. and AIG Inc. regarding loss-mitigation insurance contracts.
  • The contracts, known as finite insurance, have been used for at least a decade to smooth out volatile earnings, with companies paying premiums and filing claims to record insurance payments as income and mitigate reported losses.
  • Premiums for Ace's loss-mitigation products exceeded $800 million in 2002, but have since declined sharply.
  • The sale of these insurance contracts has raised questions about the quality and breadth of insurance regulation, with the current framework being the subject of a hearing in Washington today.
  • AIG Inc. has been named in an investigation into the fees paid by commercial insurers to brokers, with both companies also being examined for possible abuses in the sale of finite insurance contracts.
  • A former executive at Ace and two at AIG have pleaded guilty to charges of bid-rigging, with the issue of possible abuses in the sale of finite insurance contracts keeping arising in the course of that investigation.
  • Eliot Spitzer's office and S.E.C. officials have joined forces, comparing notes and deciding to investigate the industry together.

Statistics:

  • $800 million: The amount of premiums for Ace's loss-mitigation products exceeded in 2002.
  • 9 cents: Ace's shares edged up to $36.29 after the market closed.
  • 10 years: The minimum duration for which finite insurance contracts have been used.
  • $11.9 million: The amount of losses concealed by Brightpoint using contracts arranged by AIG in 1998.

Sources:

  • The New York Times, March [no date mentioned], "Ace Ltd. to Hold Annual Meeting in Bermuda on May 25"
  • The Wall Street Journal, January [no date mentioned], "Justice Department Probes A.I.G.'s Restructuring"
  • Reuters, [no date mentioned], "Investigations into the insurance industry widen, S.E.C. subpoenas Ace Ltd."