1. Insurable Contract
    Defi nition: Contract under which the insurer accepts signi cant insurance risk from the policyholder by agreeing to compensate the policyholder if an insured event adversely aff ects the policyholder
  2. Insurance Risk
    De finition: Risk, other than fi nancial risk, transferred from the holder of a contract to the issuer
  3. 3 Uncertain Items At Inception Of Insurance Contract
    • 1. Whether an insured event will occur
    • 2. When it will occur
    • 3. How much the insurer will need to pay if it occurs

    *Note: At least one is uncertain
  4. 2 Conditions For Contract To Be Eligible for Reinsurance Accounting (SFAS 113)
    • 1. Transfers signifi cant insurance risk from cedant to reinsurer, i.e., probability of signifi cant variation in amount or timing of payments is more than remote
    • 2. Either the reinsurer has a reasonable possibility for signifi cant loss or reinsurer has assumed substantially all of the risk
    • a) Some practitioners use guideline 10% probability of a 10% loss
  5. For & Against Treating As Insurance: Contracts With Legal Form of Insurance, But Don't Transfer Signi ficant Insurance Risk
    • 1. Arguments For Treating As Insurance
    • a) Traditionally described as insurance and are subject to insurance regulation
    • b) To be consistent between insurers/within a single insurer
    • c) Guidance provided on signifi cance of risk is too vague and would be applied inconsistently
    • 2. Arguments Against
    • a) Financial statements should reflect economic substance and not merely legal form
    • b) Accounting arbitrage could occur if an insigni cant amount of insurance risk made a signifi cant diff erence in accounting
  6. 13 Examples of Insurance Contracts
    • 1. Insurance against theft or property damage
    • 2. Insurance against product, professional, or civil liability or legal expenses
    • 3. Life insurance and prepaid funeral plans
    • 4. Life-contingent annuities and pensions
    • 5. Disability and medical cover
    • 6. Surety bonds, fidelity bonds, performance bonds and bid bonds
    • 7. Credit insurance
    • 8. Product warranties
    • 9. Title insurance
    • 10. Travel assistance
    • 11. Catastrophe bonds
    • 12. Insurance swaps
    • 13. Reinsurance Contract
  7. 6 Examples Of Contracts That Are Not Insurance Contracts
    • 1. Investment contracts that do not expose insurer to signifi cant insurance risk
    • 2. Contracts that pass all signifi cant insurance risk back to policyholder through adjusted future payments as a direct result of insured losses
    • 3. Self-insurance
    • 4. Gambling
    • 5. Derivatives that expose one party to financial risk but not insurance risk
    • 6. Financial guarantee contract that requires payments even if holder has not incurred a loss on the failure of the debtor to make payments when due
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