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HMRC internal manual

General Insurance Manual

From
HM Revenue & Customs
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Reinsurance and other forms of risk transfer: financial reinsurance and alternative risk transfer (ART): accounting treatment: ABI SORP

The main principles are to be found in paragraphs 248 to 264 of the 2005 ABI SORP (Statement of Recommended Practice). The economic substance of a general insurance transaction must be considered in accordance with FRS5 (see GIM8270) in terms of what assets and/or liabilities have been created. A key characteristic of reinsurance is the transfer and assumption of significant insurance risk. This may consist of either or both of underwriting risk and timing risk. Paragraph 74 of the SORP defines a transfer of insurance risk as one in which having regard to the commercial substance of the contract…there are a number of reasonably possible outcomes some of which may present the insurer with the possibility of suffering a material loss.

There will be no transfer of insurance risk where the contract provides for the reinsurer to receive no more than a lender’s rate of return under all reasonably foreseeable circumstances (paragraph 250).

Where the application of FRS5 principles does not permit the contract to be accounted for as insurance, the accounting treatment and disclosure should be appropriate to the nature of the contract (paragraph 262).