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HMRC internal manual

General Insurance Manual

HM Revenue & Customs
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Reinsurance and other forms of risk transfer: financial reinsurance and alternative risk transfer (ART): tax treatment: the FSA return

The introduction of FRS5 (GIM8270) and the ABI SORP (Statement of Recommended Practice) improved the clarity of accounting guidance. Most financial insurance and reinsurance will be accounted for in a way that is acceptable for tax purposes. On the other hand, the market for financial insurance and reinsurance is a growing one. The tax haven-based sellers of financial insurance continue to invent new products, disclosure of which may not always be obliged by FRS5 and the SORP. Financial reinsurance arrangements continue to present a risk.

Where financial reinsurance does exist, the premiums payable are likely to be substantial, and the profile of the transaction will therefore be high and easier to detect. For any company regulated by the Financial Services Authority, an insurer’s material exposure to major treaty and facultative reinsurers must be disclosed, and reinsurers must disclose major cedants. The requirements are in Rules 9.25 (treaty reinsurers), 9.26 (facultative reinsurers) and 9.27 (cedants) of IPRU (INS) (Interim Prudential sourcebook for Insurers) Volume 1. IPRU(INS) Volume 2 (Appendix 9.5) provides further information. Rule 9.29 of Volume 1 also requires extensive additional information on the insurer’s use of derivative contracts. These Rules further develop the requirements brought in by the 1996 Accounts and Statements Regulations. The disclosures must be made by means of supplementary statements attached to Forms 9 to 15 and 17. Major reinsurers and major cedants are defined as those exceeding certain premium ceded limits, and certain debt plus anticipated recoveries limits. For example, for proportional treaty reinsurance these are 2% of gross premiums, and for non-proportional treaty 5% of total non-proportional premiums. The statement must show the name and address of the reinsurer or cedant, and the amount of any premium payable, debt of the reinsurer to the insurer and deposits received from reinsurers. The extent of any connection between the parties must be shown. Where there are no disclosable major treaty or facultative reinsurers or major cedants, a nil return must be made to the FSA.

The FSA return is therefore a significant source of information on reinsurance and the starting point for any detailed enquiry into an insurer’s use of reinsurance, financial reinsurance and ART.