FSA chief executive John Tiner has written to general insurance firms this week to demand detailed information on their financial engineering activities.
Financial engineering here refers to types of reinsurance arrangements where the transfer of risk is small relative to the premiums and the accounting effect may be very different from the economic effect of the contract.
The regulator is concerned that financial engineering, and particularly finite reinsurance, could be used to “obscure the underlying financial condition of a firm, thereby misleading consumers or regulators.”
General insurers must provide information on:
· The extent to which they engage in transactions where the economic value of the transaction differs materially from the value placed on the balance sheet.
· What systems and controls are in place to subject such transactions to adequate scrutiny.
· Confirmation they are not engaged in financial engineering transactions that might obscure the firm's financial position or which could put your firm at risk of breaching regulatory requirements.
· Confirmation the firm's individual capital assessment (ICA) explains the extent to which financial engineering has been used.
