Despite the fines imposed by the FSA, the German financial
regulator BaFin will not be levying penalties on Cologne Re.

The German financial supervisory office BaFin will not fine Cologne Re, the German Gen Re subsidiary, following the discovery of financial reinsurance deals that seem to carry insufficient risk transfer. The deal, which involves Cologne Re, a German primary insurer and the group's UK company Gen Re UK, led to the Financial Services Authority (FSA) fining the latter £1.225m, the highest fine ever set by the UK regulator.

“By law, such a fine is not allowed in Germany,” BaFin spokesman Peter Abrahams said. “The two legal systems differ considerably in this respect.” BaFin could only warn management board members or remove them from office. Abrahams was not prepared to say whether such a warning had been expressed. “We cooperate closely with the FSA and have done our own investigations,” he added. Abrahams refused to give the name of the primary insurer involved in the scandal.In October, BaFin demanded that Cologne Re produce numerous documents regarding financial transactions. In an order received by the reinsurer on 24 October, BaFin said that possibly one or more of Cologne Re's senior executives were suspected of violating legal provisions in regard to financial reinsurance agreements. This was made public through a comment in the quarterly report of the US financial group Berkshire Hathaway, which is controlled by investor Warren Buffett. Berkshire Hathaway owns the US reinsurer Gen Re, which in turn is the majority shareholder of Cologne Re.

Cologne Re is under special scrutiny from BaFin following the old scandal regarding finite reinsurance contracts between Gen Re and the US insurer AIG. Contracts between Gen Re and AIG in the years 2000 and 2001, with which AIG made its reserve strength look stronger than it was, led in 2005 to investigations by the New York Attorney General Eliot Spitzer and the Securities and Exchange Commission. These had wide-ranging consequences. Gen Re had written the business via a Dublin-based subsidiary of Cologne Re.

Now Cologne Re's core business in its home market has become the focus of attention. It seems that BaFin is systematically taking a hard look at the financial reinsurance contracts of German primary insurers. In May 2006 it became public that BaFin did not accept a deal made in 2001 between the life insurer Heidelberger Leben – formerly MLP Leben – and the former Gerling Global Re, and insisted that it be cancelled.

BaFin plays an active role in the setting up of international rules for the financial supervision of financial reinsurance contracts. The office plans to propose regulations to German lawmakers. “The partners to the contract have to make sure that a risk transfer really does take place,” Thomas Steffen, responsible for insurance matters at BaFin, said in October.