GIM8110 - Reinsurance and other forms of risk transfer: types of reinsurance: Japanese earthquake risks

Reinsurance contracts made by Japanese insurers to reinsure earthquake risks sometimes provide for part of the reinsurance premium or part of the annual profit on the treaty to be held in an interest-earning fund.

Although the fund is declared by the contract to be the property of the reinsurer, the reinsurer does not have unfettered use of monies in the fund. The precise terms of fund management will vary from one treaty to another, but the following characteristics will generally be present:

• the fund is not available to the reinsurer until either the insurer fails to renew the contract or a claim is made
• when an event occurs which gives rise to a claim under the treaty the direct insurer is entitled to withdraw from the fund up to the amount of the claim
• when the fund is exhausted the insurer will have recourse to the reinsurer’s other assets
• the insurer is entitled either to a proportionate part of the interest accrued on the fund or to a sum in lieu of interest
• if the reinsurer terminates the contract it forfeits its interest in the fund.

The fund is usually administered by the ceding company or by an agent acting for it. The arrangements are largely peculiar to Japanese insurers. It is likely to be found on close analysis that the fund, and interest arising from it, are in law the property of the reinsurer. It follows that when the reinsurer is a UK company it is liable to tax on the interest credited to the fund, notwithstanding the risk of forfeiture.