Don’t pay too much attention to the newspaper reports today on legal action by HIH liquidator, Tony McGrath, against Warren Buffett’s General Re insurance company. The issue at the core of the legal action is purely financial: McGrath is trying to pressure Buffett and General Re into coughing up lots of money for the HIH creditors.

The real problem facing the world’s second richest man, and his insurance business, is the investigation by the Australian Prudential Regulation Authority (APRA) into those dodgy deals with FAI-HIH and Zurich Financial Services. And it pays to listen to someone in the business who’s very worried about these probes.

In a post annual meeting door-stop interview more than a week ago, QBE Insurance CEO Frank O’Halloran was in the middle of commenting on the guilty pleas from HIH duo, Rodney Adler and Ray Williams, when he decided to offer an opinion on why APRA is treading very carefully with the General Re case. Unprompted, O’Halloran said: “More worrying are the investigations around the world involving Elliot Spitzer (New York Attorney General) and others over reinsurance arrangements with AIG.”

That comment was tucked away in a story on the sentencing of Adler and Williams on the Nine’s Business Sunday. Coming from the head of Australia’s biggest re-insurer, “more worrying” has special significance to O’Halloran and the multi-billion dollar industry in which his company operates. “More worrying” than what? Well, more worrying than the problems caused by HIH and the sentencing of Adler and Williams.

While HIH’s collapse caused problems back in 2001 and 2002 for QBE (along with the World Trade Centre terrorist attack), the sentencing of Williams and Adler was a minor event for his company. For the world’s re-insurers and the international insurance market where QBE is a player, the problems of General Re in the US and in Australia are mounting. It backs up the contention in Friday’s Crikey that the way APRA has proceeded with setting the investigation, announced late Thursday, tells us a lot about its significance.

APRA has already banned six General Re executives from operating in this country. The bans were over dodgy re-insurance deals between General Re (owned by Buffet’s Berkshire Hathaway) and HIH-FAI. Similar arrangements with the local arm of Zurich Financial Services of Switzerland are also being probed in the APRA investigation. APRA chief, Dr John Laker sought the full backing of the Federal Treasurer for the General Re investigation because there’s only one way for it to go: to some sort of sanction that is even harsher than banning executives: banning the company from operating in certain lines of business, or totally, could be outcomes recommended or suggested to APRA.

And that’s why Frank O’Halloran is right to be worried. He’s the most important executive, and QBE is the most important company, in the local insurance market. QBE is Australia’s most internationally-minded insurer and it knows all about the importance of confidence and reputation. Any ban or harsh action by APRA against General Re will have repercussions that will spread through the whole industry and quite possibly hurt QBE.

If O’Halloran says he’s worried about the fallout from the Spitzer investigations into General Re and AIG (they are the only deals being looked at by the US regulators), then it is a big deal. O’Halloran also made clear at the QBE annual meeting this month that the group had no financial reinsurance arrangements like those uncovered in the HIH Royal Commission and recent investigations in the US. “We do not have any transactions of this nature, we have very strict policies on financial reinsurance.”

Others who clearly didn’t include HIH, FAI, Zurich and General Re.