The Reserve Bank of New Zealand is about to begin a consultation on financial reinsurance agreements.

The regulator says it is concerned that “some financial reinsurance arrangements may lead to questionable solvency benefits that could potentially undermine the objectives of the Reserve Bank’s solvency capital requirements”.

It will start public consultation soon, and warns this could lead to changes to its solvency standards.

Problems with financial reinsurance arrangements were uncovered in Australia after the collapse of HIH in 2001 and more recently in the US following the bailout of AIG.

The 2003 HIH Royal Commission found financial reinsurance had been used to bolster the company’s balance sheet rather than for its intended purpose of transferring risk.

HIH had taken over FAI Insurance only to find that FAI had negotiated reinsurance arrangements that masked under-reserving and enabled FAI to report a profit instead of a significant loss, with “side letter” agreements that meant the reinsurer involved did not have to pay out.

More recently, US courts have tried Gen Re and AIG executives over a reinsurance agreement, with prosecutors alleging the reinsurance deal was set up to inflate AIG’s loss reserves.

The “Gen Re Four” and an AIG executive had accounting fraud charges dismissed this year after they admitted aspects of a transaction were fraudulent and paid fines.