Accounting – local or IFRS - and prudential – current or Solvency II - frameworks establish a principle-based recognition of the effectiveness of the risk transfer operated by a reinsurance contract.
Insurance companies themselves must design the actual test for each of these frameworks. Now, sometimes common contractual features (variable premium rate, profit participation with loss forward,…) can make the formal proof of risk transfer complex for a specific treaty.
An analysis of different risk transfer tests suggests insurance companies should build a general process of risk transfer testing that be both qualitative and quantitative, robust, resource-efficient and compliant.