The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) is a 1989 law passed in response to a series of savings and loan bankruptcies in the 1980s. The law provides for a comprehensive regulatory and enforcement framework that sets higher minimum capital requirements and sets stricter performance standards for all savings institutions. Among other provisions, FIRREA establishes a three-tier scale of civil monetary penalties that can be applied to institutions, their directors and officers for breach of fiduciary duties. FIRREA also empowers regulators to disapprove the appointment of any director or senior executive by a troubled savings institution, and to fire or remove any director or officer found guilty of certain specified acts. FIRREA also holds directors and officers of savings institutions personally liable for monetary damages resulting from civil actions brought by regulators in cases of gross negligence.
Insurance is a contractual relationship that arises when one party (the insurer), for a fee (premium), agrees to compensate the other party (the insured) for losses caused to a certain subject (risk) caused by certain unforeseen circumstances (hazards or dangers). The term ‘guarantee’, commonly used in England, is considered synonymous with ‘insurance’.
The 10/10 Rule is a matter of analyzing and demonstrating the transfer of risk as a precondition for the use of reinsurance accounting, which was codified in the early 1990s with the adoption of Financial Accounting Standard (FAS) 113 (and its statutory counterpart, SSAP 62). FAS 113 itself was a response to alleged abuses and set the standard for testing whether something should be called an insurance contract. FAS 113 required that the transfer of risk be demonstrated by comparing the present value of the cash flows associated with the contract and, in particular, by exceeding certain thresholds of “significance” of risk. The thresholds, often referred to as the 9a and 9b tests, are: 9a. The reinsurer assumes significant insurance risk under the reinsured parts of the underlying insurance contracts. 9b. It is possible that the reinsurer could suffer a significant loss from the transaction. While neither “significant” nor “reasonably possible” was defined in this context, standard rules of thumb quickly emerged in the implementation of FAS 113. The most commonly cited is the “10/10 Rule”. This rule states that a contract reaches a threshold if there is at least a 10 percent chance that it will suffer a loss of 10 percent or more in present value (expressed as a percentage of the contract premium ceded).