The central concept here is the ‘key entrepreneurial risk
taking function’, or KERT function This is the function
likely to affect most directly the profitability of the enterprise,
requiring active decision making and the assumption or management
of risk. For an insurance enterprise, it is the
assumption of risk rather than its management
which is the focus. Once a location performing the risk assumption
function has been determined and the appropriate risk attributed to
it, it is necessary to attribute an appropriate amount of assets to
that location to back that risk, assets representing both
provisions and also surplus or capital (‘free assets’
in the language of SI2003/2714 - see
GIM10123).
The emphasis is on looking at where people are genuinely
assuming risk and performing the key risk-taking functions –
the substance rather than form, which can be supported by tangible
evidence of the reality, rather than, for example, sending
contracts for formal approval when the core decision making work is
performed elsewhere.
Other economic relationships - ‘dealings’
– may be significant; there is no presumption that these are
by nature of low value and this is where the functional and factual
analysis is important. But the attribution of investment assets to
the permanent establishment to support its insurance risk is
central. Unlike banking, for insurance activity there is no
international standard similar to the Basel Accord for determining
the amount of provisions in relation to risks or the amount of
surplus needed to absorb shocks. Both regulatory and tax rules vary
widely internationally. However, there is reasonable convergence
between systems viewing provisions and surplus together. Hence the
focus of the Report is on insurance risk assumed with no attempt to
distinguish further.
