Document ID: chunk:federal_register_of_legislation:F2023C00194:body:0:p37
Version: federal_register_of_legislation:F2023C00194
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risk).  Such contracts are insurance contracts.
10 Under some contracts, an insured event triggers the payment of an amount linked to a price index.  Such contracts are insurance contracts, provided the payment that is contingent on the insured event can be significant.  The link to the price index is an embedded derivative, but it also transfers insurance risk.  If the resulting transfer of insurance risk is significant, the embedded derivative meets the definition of an insurance contract, in which case it need not be separated and measured at fair value (see paragraph 2.3.1 of this Standard).
11 The definition of insurance risk refers to risk that the insurer accepts from the policyholder.  In other words, insurance risk is a pre‑existing risk transferred from the policyholder to the insurer.  Thus, a new risk created by the contract is not insurance risk.
12 The definition of an insurance contract refers to an adverse effect on the policyholder.  The definition does not limit the payment by the insurer to an amount equal to the financial impact of the adverse event.  For example, the definition does not exclude 'new-for-old' coverage that pays the policyholder sufficient to permit replacement of a damaged old asset by a new asset.
13 Some contracts require a payment if a specified uncertain event occurs, but do not require an adverse effect on the policyholder as a precondition for payment.  Such a contract is not an insurance contract even if the holder uses the contract to mitigate an underlying risk exposure.  For example, if the holder uses a derivative to hedge an underlying non financial variable that is correlated with cash flows from an asset of the entity, the derivative is not an insurance contract because payment is not conditional on whether the holder is adversely affected by a reduction in the cash flows from the asset.  Conversely, the definition of an insurance contract refers to an uncertain event for which an adverse effect on the policyholder is a contractual precondition for payment.  This contractual precondition does not require the insurer to investigate whether the event actually caused an adverse effect, but permits the insurer to deny payment if it is not satisfied that the event caused an adverse effect.
14 Lapse or persistency risk (i.e. the risk that the counterparty will cancel the contract earlier or later than the issuer had expected in pricing the contract) is not insurance risk because the payment to the counterparty is not contingent on an uncertain future event that adversely affects the counterparty.  Similarly, expense risk (i.e. the risk of unexpected increases in the administrative costs associated with the servicing of a contract, rather than in costs associated with insured events) is not