Last year, Shirley Beglinger – a former managing director at Swiss Re (and one of the few UK insurance practitioners who actually understands Basel 2) – wrote a paper for the CSFI on the difficulty of regulating the non-life insurance industry.  It created quite a stir, both in the insurance industry and more broadly.  Now, she turns her firepower on the short-termism of accountants, actuaries and regulators – who all make it unnecessarily difficult (indeed, well-nigh impossible) for insurers to build up the long-term reserves that they need to protect themselves in such a volatile industry.

Although Eliot Spitzer’s investigation of AIG has made finite re a dirty word, Shirley’s (very persuasive) argument is that finite re is a rational response to the exigencies of an irrational accounting and regulatory environment. In other words, because accountants and regulators fail to understand that insurance needs special treatment to allow (indeed, to encourage) accumulation of substantial long-term reserves, the insurers have been driven to develop finite re contracts (and other derivatives) as a way to build up the provisions they need without being held to ransom by the taxman.

It is a powerful paper, bound to ruffle a few feathers.