Zurich Financial Services Australia (ZFSA)and Zurich Australian Insurance Limited (ZAIL) have admitted accounting errors regarding reinsurance contracts and have agreed to two enforceable undertakings (EU) with the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commission (ASIC).

In the undertakings, ZFSA and ZAIL accepted that information was withheld and misstatements were made to the regulator, auditor and actuary. Additionally, “a number of people knowingly misled” APRA regarding the true nature of certain reinsurance contracts. What had been accounted for in the 2000 accounts as a loss portfolio transfer and related transactions should have been characterised as financial reinsurance.

This error resulted in the firm’s 2000 accounts being overstated by $61 million. This meant ZAIL appeared to meet the regulatory solvency requirement when it did not. ZAIL and ZFSA admitted to the regulator that past conduct “fell seriously short of acceptable practice”.

However, Zurich will not have to restate its accounts, as has been reported. The errors contained within the 2000-2003 accounts will now be corrected through a note to the companies’ audited 2003 accounts.

While a settlement has been reached with APRA and ASIC regarding the accounts of ZAIL and ZFSA, ASIC is continuing its investigation into the reinsurance arrangements.

Reinsurance has been attracting regulatory attention globally in recent months for all the wrong reasons. In the US, American International Group (AIG) was forced to admit that it had misstated accounts relating to reinsurance sold to the firm by reinsurer General Re.

“Based on its review to date, AIG has concluded that the Gen Re transaction documentation was improper and, in light of the lack of evidence of risk transfer, these transactions should not have been recorded as insurance,” the firm said in a statement.

However, New York Attorney General Eliot Spitzer, has filed a lawsuit against AIG in relation to reinsurance practices. Spitzer’s suit alleges AIG manipulated its books to mislead regulators and investors and that senior managers undertook several fraudulent business transactions that exaggerated the firm’s strength.

Moreover, in Europe, the German financial regulator has warned insurance companies not to “beautify” their financial results through the use of reinsurance. Observers there said the regulator was publicly indicating that local companies might have used reinsurance to window-dress their balance sheets.

See page 13 for a look at reinsurance