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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
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Insurance Risk
De finition: Risk, other than fi nancial risk, transferred from the holder of a contract to the issuer
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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
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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
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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
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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
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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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