If the prudential regulator for
insurance companies, APRA, has already banned executives (four from Australia, two from overseas) employed by Warren
Buffett’s General Re re-insurance group from working
in Australia, what’s the need for an official
investigation? We know General Re was a naughty
company and has seen its employees banned last October from involvement in an insurance
business in this country. More bans are therefore not an obvious outcome of this
investigation.

Rather more likely could be bans on
General Re doing business in this country at one extreme, or limitations on the
sort of business it can write. Either way the results of this
investigation and APRA’s decisions will be significant
for General Re’s reputation, as well as that of APRA.

No wonder APRA head, Dr John Laker is understood to have sought the complete approval and
support of Federal Treasury for this investigation. This could very well be the most
delicate and important inquiry APRA has conducted, with ramifications that could
impact on the world-wide multi-billion dollar re-insurance
market. APRA and the government could
therefore be exposed to some enormous pressures not to impose bans as a result
of the investigation, but to limit any punishment to other sorts of sanctions.

News of the APRA inquiry came late
on Thursday in the wake of the jailing of Rocket Rod Adler. It is
a so-called Section 52 inquiry, possibly the most serious APRA can make into an
insurance company’s business. In a bland statement
APRA said it had appointed an investigator to examine a number of
issues. General Re’s Australian arm is part
of Warren Buffett’s General Re (owned by Berkshire
Hathaway), one of the world’s leading re-insurers now caught up in embarrassing
investigations in the US into its US$250 million of deals with AIG similar to
those with FAI/HIH. In Australia APRA has been probing
General Re for its dealings with FAI/HIH and also the local arm of Zurich
Financial Services.

A financial re-insurance deal with
the local arm of Zurich Financial Services will also be investigated. The APRA
probe last year cost the Australian CEO of Zurich, John Butler his job, and that of a
former actuary. Zurich also has agreed to restate four years of accounts
from 2000 to 2004. General Re has been on APRA’s hit list since it
emerged during the HIH royal commission in 2002 that it had helped
inflate FAI’s profit by more than $28 million – through a loan
disguised as a re-insurance contract (also called financial
re-insurance).

So why the
investigation? After all, banning executives is a
pretty serious punishment. What can APRA do now? More bannings? General Re remains more than adequately
capitalised according to APRA, so there are no problems on the financial
side. What are the options for APRA?
A ban on General Re’s operations in
Australia of some sort, or limiting it to offering only certain products and
completely banning it from offering so-called financial re-insurance or what it
calls ‘finite’ insurance, or ‘Alternative Solutions’. We don’t know because APRA
isn’t talking!

Any ban would be a blow to the credibility of the company and Warren
Buffett. There’s been no sign of any bans in the US. Any ban here would
also put pressure on General Re’s operations in Ireland where one
banned executive continues to operate and was involved in the AIG
situation (Mr Houldsworth). Ireland has favourable tax laws designed to
attract financial services such as re-insurance. A ban here would have
ramifications there and elsewhere. Big stakes all round.

The investigator from outside APRA
is Estelle Parsons of Finity Consulting. Estelle Pearson was
an expert witness during the HIH royal commission, which exposed her to rigorous
cross-examination of her criticism of the financial reinsurance transactions
entered into by FAI and HIH. APRA said she will
examine General Re’s “complex financial products in relation to financial and
finite reinsurance and the marketing and promotion of those products.”

Besides the APRA investigation
General Re is also facing possible legal action from HIH liquidator Tony
McGrath, of McGrath Nicol & Partners. He said last
month he was looking at claims of deceptive conduct against General Re, a
subsidiary of Buffett’s investment company Berkshire
Hathaway.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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