The Australian Prudential Regulation Authority (APRA) has given Zurich Australian Insurance Limited (ZAIL) the report on its investigation into a set of improper financial reinsurance transactions undertaken in 2000 by ZAIL. The report was released to ZAIL after obtaining the Attorney General’s advice, as required by the Insurance Act 1973.
The reinsurance transactions resulted in ZAIL’s profits in 2000 being overstated by $61 million, at a time when the company was at risk of regulatory insolvency. The transactions, as booked by ZAIL, created the impression that the company had made a substantial profit in 2000, when in fact it had made a loss. A brief description of the transactions involved is attached to this Media Release.
In May 2005, APRA accepted Enforceable Undertakings from ZAIL and Zurich Financial Services Australia Limited in relation to the transactions. These can be viewed on APRA’s website at www.apra.gov.au/Media-Releases/05_31.cfm.
APRA is satisfied that ZAIL has undertaken all necessary remedial actions in relation to the transactions and, as announced in May 2005, no further action will be taken with respect to ZAIL. ZAIL restated its financial accounts for the relevant years and currently meets all prudential requirements, including those related to capital adequacy.
APRA is still finalising action against individuals involved in the Zurich transactions with General & Cologne Re Group Australia (GCRA), under the relevant provisions of the Insurance Act 1973. No criminal actions will be pursued. Separately, APRA is finalising work related to its investigation into GCRA.
Since commencing its investigations into the Zurich transactions, APRA has taken the following actions against former Zurich executives:
Brief description of the reinsurance transactions covered by APRA’s investigation into Zurich Australian Insurance Limited (ZAIL)
APRA’s investigation, which began in May 2004, found that the original ZAIL transaction with General & Cologne Re Australia (GCRA) was one component of a series of related transactions which, viewed in their entirety, resulted in the Gen Re group bearing no residual risk.
By contrast, proper reinsurance is the transfer of the risk of a loss from an insurer to a reinsurer and is a normal financial tool used to reduce the variability in an insurer’s business to a level than can be supported by the insurer’s capital. ZAIL should have accounted for the transaction as a deposit arrangement, not as a reinsurance arrangement and, if properly accounted for, would have been of no commercial benefit to ZAIL.
The entirety of the transactions was a complex and opaque arrangement that involved multiple contracts spanning several legal jurisdictions. In summary, the transactions included the following key features:
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ZAIL paid a premium of $137.75 million to GCRA for reinsurance cover up to $254 million in excess of $10 million (on its pre‑January 2000 liability business), which on a stand-alone basis could be considered as traditional reinsurance (1st leg).
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Of the original premium, $134 million was invested in an externally managed fund and the remaining $3.75 million was taken by GCRA as an upfront fee. GCRA fully retroceded its exposure above the premium to Cologne Re Dublin (CRD) (2nd leg).
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CRD’s indirect exposure to ZAIL was in turn fully retroceded to Zurich Bermuda (later to revert to the Zurich parent company when Zurich Bermuda closed down) (3rd leg). It was Zurich Head Office’s intention that the retroceded losses would ultimately be met by ZAIL once its capital position improved. Thus, from a ZAIL perspective there was no risk transfer. However, the transactions were subsequently unwound with Zurich Head Office effectively funding the substantial underwriting losses.
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Reinsurance recoveries claimed by ZAIL under the 1st leg were to be paid out of the externally managed investment fund. In the event that the fund was inadequate, which was seen as a probable outcome in the future, the shortfall was to be met by Cologne Re Australia (CRAUS) under a ‘stop loss’ reinsurance contract it provided to ZAIL, with CRAUS’s exposure being fully retroceded to CRD (4th leg). CRD’s exposure was nil in view of the retrocession to Zurich Group, as above
The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry. APRA is funded largely by the industries that it supervises. It was established on 1 July 1998. APRA currently supervises institutions holding approximately $2.5 trillion in assets for 20 million Australian depositors, policyholders and superannuation fund members.
Media and industry inquiries only:
Andrew McCutcheon, Public Affairs Manager
Australian Prudential Regulation Authority
Telephone: 02 9210 3143
Mobile: 0417 528 660
All other inquiries:
APRA Contact Centre 1300 131 060
