December 12, 2008 by Canadian Underwriter
The U.S. Securities and Exchange Commission (SEC) has settled civil securities fraud charges against Zurich Financial Services and Converium Holding AG, now known as SCOR Holding (Switzerland) AG, relating to finite reinsurance transactions.
Without admitting or denying the SEC’s findings, Zurich and Converium agreed to settle the SEC’s charges. Zurich will pay a US$25-million penalty.
The SEC’s orders found that Zurich’s former reinsurance group, which operated under the name Zurich Re and was later spun off in 2001 as Converium, designed three reinsurance transactions to make it appear that risk had been transferred to third-party entities when, in fact, the risk remained with Zurich-controlled entities.
“According to the SEC’s orders, Zurich Re — and later Converium — improperly used reinsurance accounting for the transactions enabling them to artificially inflate their performance figures,” the SEC stated in a press release announcing the settlement.
“This misconduct allowed Zurich to receive a significant windfall when it spun off Converium in a December 2001 initial public offering.”
A finite reinsurance agreement has been the subject of much discussion in the industry concerning its status as an alternative form of risk transfer. It is defined online as “a type of reinsurance that transfers over only a finite or limited amount of risk.” (An example would be earthquake reinsurance coverage offered for a limited period of time.)
Finite reinsurance agreements have sometimes come under fire from regulators, which argue that the contracts are legitimate as long as there is a legitimate risk being transferred.
SEC argued that Converium in two cases purchased reinsurance from third-party reinsurers, which then subsequently transferred the risk back to Zurich-held companies through retrocessional reinsurance contracts.
In a third instance, “Zurich Re ceded the risk to a third-party reinsurer but simultaneously entered into an undisclosed side agreement in which Zurich Re agreed to hold the reinsurer harmless for any losses realized under the reinsurance contracts,” the SEC found.
“Because the ultimate risk under the reinsurance contracts remained with Zurich-owned entities, these transactions should not have been accounted for as reinsurance,” the SEC concluded.