The UK Financial Services Authority (FSA) has produced new proposals for regulatory reform that includes guidance on reporting reinsurance contracts.

A consultation paper, “Prudential changes for insurers”, says the new rules will require companies to make appropriate disclosure in financial reports about the existence of financial reinsurance contracts or similar arrangements and their effect on capital resources.

Financial reinsurance has been in regulators’ spotlights since it was revealed that collapsed Australian insurer FAI and US insurer AIG used such contracts to inflate their profits.

The UK changes will apply to financial years ending after December 31 this year. The FSA says the submissions from insurers to the consultation paper support a principles-based approach to financial reinsurance

“They also support our view… that it would not be practicable to define the characteristic terms and conditions of financial reinsurance agreements through specific rules,” the paper noted.

CEO John Tiner says the FSA intends to move towards a more principles-based approach to financial services regulation.

“By more principles-based regulation I mean a shift more consciously and explicitly to focus on outcomes for firms, markets and consumers, rather than the prescription of detailed rules and formal guidance.”

Mr Tiner says if the market is to foster innovation and competition, everyone must be prepared to accept the uncertainty brought about by principles-based regulation.