Code of Practice

Captive Reinsurance White Paper - Prudential Financial

Posted: 2017-12-16 16:38

General overview of tax matters Key question for all stakeholders is – Does the Captive arrangement qualify as insurance under the Internal Revenue Code (“IRC”)? From the Captive’s perspective Understanding federal income tax computations ( . taxable income and earnings & profits) Understanding the application of excise taxes Understanding the application of various indirect taxes ( . state tax, premiums tax) From the insured’s perspective Understanding if the premium payments are deductible for . tax purposes Understanding if any other taxes or fees may be attached (. foreign income or withholding taxes) From the owner’s perspective Understanding any tax implications

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Excise Tax – Cascading Theory Section 9876 of the Code imposes an excise tax on each policy of insurance, indemnity bond, annuity contract, or policy of reinsurance issued by any foreign insurer or reinsurer Rates: Direct business: Casualty and indemnity bonds: 9 percent Life , sickness, accident & health, and annuity contracts : 6 percent Reinsurance : 6 percent Revenue Ruling 7558-65 describes the insurance excise tax consequences of insurance premiums paid by one foreign (re)insurer to another Service position is the FET applies to every transaction of reinsurance with a foreign reinsurer ( if US risks are reinsured) – Cascading Theory IRS exam activity involving the FET Reinsurance of captives with foreign reinsurers The . has a number of bilateral treaties in place that eliminate FET (. UK, Ireland however, the Cayman Islands are not eligible for a treaty

PPT – CAPTIVE 101 PowerPoint presentation | free to

What does matter, though, is that a captive insurance company challenged the IRS and the Tax Court, and precedent has now been set. The cumulative fact pattern was found to be unfavorable to the Avrahami case, but individual pieces of the fact pattern may very well be extant in varying context in other captive insurance companies of legitimate operation around the rest of the world. The Avrahami case is the proverbial bad apple in the barrel that will likely only serve to increase legislative scrutiny and IRS distrust of all other captive programs.

Captive Insurance Companies, Establishing, Tax Benefits

Another kind of group-owned captive allows a group of insureds from entirely different industry groups to own a captive jointly. This type of heterogeneous group captive may be a reinsurance pool, formed to create underwriting capacity through the pooling of risk. A reinsurance pool does not provide direct insurance. It reinsures either the captives of its owners or the admitted insurers that issue policies to the pool''s owners. The group captive or pool may also provide other risk management services for the group.

Employee Benefit Captives - Aon - Retirement

Recent Developments Rent-A-Center Inc. v. Commissioner (Cont’d) Opinion The Tax Court (majority opinion) rejected the Service’s assertion that the transactions among RAC, its affiliates and Legacy was a circular flow of funds and thus a sham. The majority opinion concluded that RAC presented convincing evidence that risk was present, risk was shifted and distributed, and that Legacy was a bona fide insurance company. The dissenting opinion argued that the parental guarantee indicated that risk was not shifted. Implications Majority opinion contains a number of favorable implications for taxpayers who have captives or are considering forming captives, including: A limited parental guaranty may be acceptable in certain cases Purchase of treasury shares does not result in a circular flow of cash (helpful for captive owners that want to purchase related party financial instruments) Risk distribution can be determined by the number of statistically independent risks Premiums and claims can be netted in certain circumstances

DETAILED BUSINESS PLAN (Submit Separate Document) A. PURPOSE

Since the financial benefits of a captive materialize over time, the decision to use a captive arrangement is not a plan-year-to-plan-year determination rather it is a long-term commitment to the risk management method. Plan sponsors that want to make year-to-year decisions on the retention or transfer of stop loss risk are better served by continuing to deal with the traditional commercial stop loss marketplace and adjusting the amount of retained risk through changes to the specific attachment points in their policies.

Captive Insurance: PowerPoint Presentation, PPT - DocSlides

There is one additional requirement for the captive to be considered an insurance company for federal purposes. More than 55% of its total revenue must be from the issuance of insurance or annuity policies (Sec. 866(a)). In the early years of a captive’s existence, this requirement should not present a problem, but in later years, assuming the captive and its investment program succeed, this would need close monitoring to assure compliance.

Cayman Captive Forum Presentation 2013 - IMAC

State Tax on the Purchase of Insurance Three Ways to Purchase – Three Ways to Tax Purchase a policy from an insurer authorized to write in the state Authorized insurer pays a premium tax to the state Purchase a policy using an authorized broker, from an insurer not authorized in the state Broker collects tax from the insured and pays it to the state Purchase a policy from a company not licensed in the state Insured pays the tax to the state

Self-Insurance solutions | SIM

A captive may not incur premium taxes and insurance company profit margin, and contribution to surplus would be eliminated by using a captive. However, these expenses are relatively low compared to the other expense components. In addition, during the initial start-up years and in times when the captive sustains poor claims experience, the captive will require a load to premium to build up its own needed surplus. Underwriting, overhead and claims adjudication expenses will also be incurred to operate a captive. In order to determine if there will be any projected savings, the specific facts and circumstances of how the captive is set up and operated need to be understood.

Captive Insurance Definition, What is Captive Insurance?

The requirement for adequate initial capitalization of the captive is dependent in part on the level of risk projected to be assumed by the captive and the requirements of the particular domicile chosen. In some cases, this initial capitalization can be accomplished through the use of irrevocable letters of credit. The irrevocable letter of credit would be obtained by the sponsor applying to the bank for this letter of credit. This will involve a fee for the issuance of such a credit facility and may restrict the sponsor’s other borrowing capability.

Captive Insurance Companies - National Association of

Captives were first formed by companies in the United States in the 6955s. The main reason for their formation was to provide insurance coverage that was either not available in the commercial marketplace or too expensive. Professional liability, workers&rsquo compensation and auto liability coverage are the most common types of insurance underwritten by captives. As companies and trade groups experienced long-term savings through captive insurance companies, captives were expanded to handle other types of property and casualty risks as well as employee welfare benefit plans, typically those sponsored by large employers. Another use of a captive is to access insurance markets that otherwise would not provide primary coverage. An example of this use is in marine insurance where a captive is used to retain an initial layer of hull protection and indemnity coverage in order to access particular underwriters, such as those at Lloyd&rsquo s of London, for placement of the majority of the desired coverage.

What is Captive Insurance? (with pictures) - wiseGEEK

Captive insurance is insurance or reinsurance provided by a company that is formed primarily to cover the assets and risks of its parent company or companies. It is essentially an “in-house” insurance company with a limited purpose and is not available to the general public. This is an alternative form of risk management that is becoming a more practical and popular means through which companies can protect themselves financially while having more control over how they are insured.

Captive Insurance: Surviving Heightened IRS Scrutiny

. Investents by Foreign Corporations 85 % withholding tax (WHT) on certain types of income that is . sourced income, paid to a foreign corporation, and not effectively connected with a . trade or business Treaty exceptions may apply Examples: Interest (with certain exceptions) Dividends Rents Salaries and wages Premiums Any other “fixed or determinable annual or periodical” income.

An Agency Captive is a reinsurance company owned by a separate insurance company to reinsure their client’s risks. Reinsurance is a type of insurance in which insurance companies share the burden of a catastrophic loss with other insurance companies, usually on a global basis. Put simply, an insurance company buys insurance to cover its own loss when its claims are devastatingly high. The last type is the Rent-A-Captive , which provides the benefits of a captive company for a fee to small companies that may not have the resources to form their own.

Definition of Insurance Parent Parent has not shifted its risk to Sheet paid from Parent to Captive are not generally shift risk to paid from Subs to Captive are generally deductible provided certain bona fides are satisfied: premiums are arm’s length, the Captive is adequately capitalized, and the Captive is not propped treated as an insurance company. Parent Subs Brother / Sister Risks Premiums Premiums Subs Captive

Cell Companies / SPCs What is a segregated portfolio company / cell company (“SPC”)? Captive is often owned by a sponsor that allows third party insureds to “rent” a “cell” from the captive to place their risks in isolation from the risks of other cells and the sponsor’s “core” Cell structures may be attractive to smaller companies interested in easing into a captive insurance vehicle Taxpayers have frequently treated cell companies as one entity from a federal tax perspective for purposes of bolstering their position that the transactions involving the insureds within the cell qualify as insurance IRS initially issued guidance that the federal tax analysis regarding whether an arrangement qualified as insurance should be made on a cell by cell basis rather than at the level of the cell company as a whole this guidance did not indicate whether each cell should be treated as a separate entity

A captive insurance company combines the potential benefits and risk of self-insurance with the structure of an insurance company that can offer tax and administrative benefits. A captive insurance company is an insurance company formed by a parent company, a group or an association that primarily insures only the risks of the business or group to which it relates. A captive can be single, where the insurance company insures only the risks of its parent company and its affiliates, or it can be owned by a number of companies in a group arrangement. Trade or industry associations can form captives. Entities engaged in a similar business or activities that are exposed to similar liabilities can form a Risk Retention Group (RRG) under the Liability Risk Retention Act of 6986 (LRRA) and own a captive. Insurance brokers can form captives to insure a portion of their clients&rsquo risks. Captives can be owned by entities that only operate and rent them to entities that want to use captives but do not want to own and operate them.

In this case, the Tax Court focused first on the presence of risk distribution. While the parties disagree on the number of entities or risks that are covered by Feedback policies, expert witnesses for both sides argued that “more risks” are necessary to achieve a large enough pool than exists in the Avrahami fact pattern. Looking beyond the number of insured entities, the Court went on to stress the importance of the number of independent risk exposures. With only seven types of policies issued by Feedback to three or four affiliated passthrough entities covering three jewelry stores, two key employees, 85 employees and three commercial real estate properties, the Court found that this was not sufficient to meet the guidance of previously tried arguments[8] even in the context of a micro-captive program.

The company paying the premiums receives a tax deduction, and the captive insurance company receiving the premiums receives the first $ million tax-free. The statutory captive insurance company will elect to be classified as a domestic insurance company as indicated under IRC Section 958(d). It will, therefore, file US tax returns annually. However, premium income up to the first $ million is exempt from taxation. In the following calendar year, another $ million can be contributed, for a total of $ million over two years, $ million in premiums are tax deductible over three years, etc.

General overview of tax matters Insured‘s perspective An insured that pays a premium to an insurance company that qualifies as such under the IRC will be able to deduct the premium paid as an ordinary business expense under IRC § 667 Deductibility of premium payment is preferred versus deductibility under a self insured approach which is generally restricted to deductibility as claims are incurred and claim payments are made Other tax implications may include Liability for excise taxes, if applicable Liability for state premium taxes, if applicable Liability for self procurement taxes or tax for payment to unauthorized insurers