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AIG: Before Credit Default Swaps, There Was Reinsurance

"the risk shifting shell game" The quote from the story is the absolute definition of insurance (without the provocative phrase "shell game").

It is true that reinsurance is basically "surplus renting". What's wrong with that? The side agreements basically say the the ceding company will stay with the reinsurer until the "loan" is paid back. Hardly a crime!

BTW there are four types of reinsurance although the article deals with only one-which one is undisclosed.

Every time an insurance company writes a piece of business it has to put aside capital as a cushion. The only way an insurance company can get larger than its capital base is by selling more capital, reinsuring the risk or cheating as AIG did by hiding in an unregulated jurisdiction and not putting up capital. Aside from the last method reinsurance is an obvious, rational and ethical choice.