Thursday, January 12, 2006


Well, as a philosopher I tend not to be all that au-fait with things topical, but one perk of my job is that I get to hang around with people who know their stuff. This week the leader of the project that I work for had an article in the Irish Times (subs required, but we have the text from the article up on our site here) outlining the manner in which Dublin became the hub for a major piece of false accounting in the reinsurance industry. According to Justin, this has had a major reputational impact on Ireland as an offshore financial centre

Reinsurance is just what it says on the tin: insurance companies insure their books against huge losses so that they can survive major claims, in the same way that small bookies pass parts of bets on to bigger bookies when they are made. When it's working properly the reinsurer takes a portion of the risk on, for a premium, and pays out if required.

Fraud happens (for example that between American International Group and General Re) when money is supposed to be transferred but, secretly, no risk is transferred (and not much of the money). When this happens the client (equivalent to the small bookie) essentially receives a loan from the reinsurer but sticks the transaction on the books as an asset rather than as a liability (I'm a bit hazy on this, but I think that that's what's going on). So AIG was able to overstate their market value. General re was paid a fee without taking on any risk of having to pay out money.

There's lots more on this in various places, including in the Washington Post, on the Law Professors' Blog, in the Irish Times, and in the Insurance Journal.

But for Ireland it comes down to this: the country is no longer a cheap place for doing business (given the rise in the corporate tax rate), but any advantage it might have in terms of reputation (advanced European democracy and all that), will not be helped by these sorts of events. Whether or not there was regulatory oversight involved (and you should not Justin's quote from Charlie McCreevy on this), it is not good news. And neither is it going to go away.

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