Financial reinsurance is useful and logical, although recent revelations at the HIH Royal Commission have brought it into some disrepute. Now the British Financial Services Authority has announced it will investigate the use of financial reinsurance by life insurers.

The regulator favours securitisation rather than financial reinsurance. The lack of capital available in the market has almost brought an end to financial reinsurance, anyway.

The FSA is investigating the transfer of cash to the insurer at the time of reinsurance, and transparency in relation to an insurer’s solvency position. The move follows survey results released last week that showed 11 out of 20 companies include “expected future profits” in their year-end 2001 calculations, which in turn affects aggregate results.

An FSA statement said new regulations will ensure the insurers' solvency positions are much clearer.