New regulations being brought to bear on companies that buy or sell finite risk policies may dampen demand, but they won't spell the end of the policies, according to experts.

"Is this the death of finite? You have to look at the pure business person's attitude, and that is that finite risk still presents an option, especially if I don't have any other option," said Andy Barile, a reinsurance veteran who now runs a private consulting practice.

Finite risk is a loss mitigation tool that has caught the attention of regulators for its ability to mask a company's losses. But Mr. Barile pointed out it was pioneered more than 20 years ago in response to constrained reinsurance capacity making it too expensive for some to buy in the traditional marketplace.

Questions over the future of finite risk come on the heels of a continued probe into use of the policies, which are also sometimes referred to as loss-mitigation contracts. The furore has resulted in new requirements on chief executive and financial officers, namely a requirement to attest to US regulators, under penalty of perjury, that finite contracts pass muster under insurance accounting rules.

The changes, adopted in mid-October by the National Association of Insurance Commissioners, are binding on a company's top officials under new accounting practices and procedures that take effect when companies make their 2005 filings. "The question is whether the industry will decide if the certification in the post-Spitzer world" is worth the trouble, said David Raim, a partner with law firm Chadbourne & Parke LLP. "Different companies have very different reactions. Some see opportunity and some are shying away rather than have to comply."

Mr. Raim was one of several lawyers to take part in a panel discussion focused on finite's future at October's annual Hawksmere International Reinsurance Congress in Bermuda.

Mr. Barile fears the implications of the regulatory clampdown on finite may not have been thought through, including the extra costs it could bring to bear on investors and policyholders. "It is costing a great amount of money and that has to be passed on to somebody," he said in a telephone interview from California.

Mr. Barile, who wrote the only textbook in print on finite risk, said he's baffled that regulators are so keen on the subject now after offering to explain finite to regulators for years, and finding there wasn't much interest. "They turn the spigot on and then turn the spigot off ... that is not great regulation," said Mr. Barile. He said regulators may be overwhelmed, citing the example of at least one state having sought information on more than 200 finite policies, with it not uncommon for these complex contracts to be equal to a small book in length.

All in all, Mr. Barile said the expanded regulatory requirements amount to a "tremendous deluge" of new work for company officers. Others are critical because management are already being pulled away from the day-to-day running of their companies by having to complying with new corporate governance requirements, and that will be compounded by this.

And the NAIC are not the only ones looking for greater disclosure, but they take it the furthest. Under the NAIC rules, top management in the property-casualty insurance sector have to report to state insurance regulators significant information on contract terms and management objectives related to any finite reinsurance agreements in the last 12 years that alter policyholders' surplus by more than three percent, or represent more than three percent of premium or losses under the contract. Chiefs will also have to formally state that there were no verbal or written side agreements made separately to alter the economic impact of any finite contract they were involved in.

While Bermuda insurers don't currently face finite risk attestation requirements from financial services regulators at the Bermuda Monetary Authority, most will come under the NAIC's requirements because they sell policies in the US. The increased scrutiny follows misuses being uncovered by an ongoing regulatory probe launched early in the year by New York Attorney General Eliot Spitzer. The probe was sparked by the discovery that American International Group Inc. had misused a finite contract to hide losses. The commercial insurance giant in May restated several years of its financial results, in large part because of a $500 million contract it bought from a unit of Warren Buffett's Berkshire Hathaway.

While finite risk can be sold as insurance or reinsurance, there's a twist. Under a finite contract the ultimate liability of the reinsurer is limited. In exchange the buyer has the option to share in the profitability of the contract if there is a 'good loss experience', or little occurrence of loss.

Finite re/insurance, when abused, can amount to a low-cost loan flying below regulatory radar, according to rating agency Standard & Poor's. AIG's misdeeds have prompted regulators to scour contracts at other companies, and several have restated prior-year financial statements after finding finite risk contracts were not accounted for properly.

For example, ACE Limited restated several years' of results related to finite risk contracts it should have counted under deposit accounting rules because risk-transfer tests weren't passed.

It was a costly and time consuming exercise for ACE, which, in an August SEC filing, said it had paid out about $30 million related to an internal investigation into its use and sale of finite risk policies. On top of that was about $44 million in legal costs.

ACE hasn't been charged with any wrongdoing by the more than 40 regulatory bodies that have asked for information related to the contracts.

RenaissanceRe, another Bermuda reinsurer, has also faced upheaval under an internal investigation of its finite contracts. The company in February made a multi-year financial restatement related to a finite risk contract it bought from Inter-Ocean Reinsurance, a company that no longer sells policies, but was nine percent owned by RenRe.

This week, James Stanard, RenRe founder, chairman and chief executive, resigned from the company in a move the company said was in light of the ongoing investigation into its purchase of the finite risk contract from Inter-Ocean.

Scores of other Bermuda insurers have admitted to getting regulatory subpoenas for information about their sale or purchase of the contracts. But months after the first subpoenas were issued, it isn't clear when the regulatory probe of finite risk will end, or even how it will end.

Mr. Raim said he had sat in on meetings between insurers and officials from the Southern District of New York and what he came away from those meetings with was a sense of how cynical and sceptical the regulators are "about anything finite, and anything coming out of Bermuda.

"The cynicism and scepticism is on the Bermuda reinsurance front. They cannot intellectually seem to let go," he said.

In addition, regulators are also troubled over how Bermuda companies are able to legally discount reserves, Mr. Raim said. "They look at it as just wrong, and they are trying to reach into this jurisdiction."

Despite the heightened scrutiny, and clear examples of misuse, many say finite risk has been given a bad rap because of the sins of a few.

Mark Puccia, a managing director of insurance ratings for Standard & Poor's, said at the Hawksmere conference: "The fact is that the vast majority of finite contracts are legitimate: There is plenty of risk transfer, the accounting treatment is appropriate but there are a number of bad apples out there ..."

Mr. Puccia said insurers who use finite risk legitimately have little to fear from his ratings firm, because analysts are only concerned about contracts "where the accounting differs from economic reality". When it does, S&P makes an adjustment.

John Carroll, a partner with law firm Clifford Chance LLP said insurers who want to keep regulators happy should "disclose, disclose, disclose. It is a disclosure world: It is not fraud if you disclose it, it's that simple."

Mr. Carroll is a former chief of the Securities and Commodities Fraud Task Force, and before that served as in the US Attorney's Office for the Southern District of New York. He represents clients caught up in criminal, civil and regulatory disputes, particularly in matters involving the Department of Justice, SEC and other regulators.

While Mr. Carroll said finite risk was a "valid, incredibly thoughtful, well-engineered product, I am not as sanguine as some that this is going to go away quickly".

He predicted there could be more prosecutions in the wings, and it could be another three to five years before the issue completely goes away.