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Court considers premium payments to captive.

P. Bruce Wright is a member of the New York Bar. He is also a member of the law firm LeBoeuf, Lamb, Leiby and MacRae.

In the 1990 Gulf Oil Corp. v. Commissioner case, the 3rd Circuit Court considered the 1987 U.S. Tax Court decision, which effectively denied Gulf and some of its affiliates a deduction for premiums paid to Gulf's wholly owned Bermuda insurance subsidiary, Insco.

The court reaffirmed the Tax Court's decision but commented on Humana Inc. v. Commissioner and certain dicta in the Gulf case when it was considered by the Tax Court. In the 1989 Humana case, the 6th Circuit Court held that Humana subsidiaries could pay premiums to one another, then deduct them as insurance payments.

The court fully delineated the facts in Humana, indicating that the captive insurer was fully capitalized initially, no agreement existed regarding whether Humana or another affiliate would contribute additional capital to the insurer and neither Humana nor other insured affiliates ever contributed different amounts to the captive other than premium or took steps to insure the insurer's performance. The court noted that none of these facts existed in the Gulf case and concluded that the transference of risk to Insco during the years in question was difficult to substantiate.

The court recognized the Tax Court opinion that 1975 premiums from unrelated parties of 2 percent of total net premiums were considered de minimis and did not demonstrate the true transfer of risk.

It also noted a concurring opinion of one judge which warned that the majority's opinion would create a problem requiring the Tax Court to decide when third party premiums are no longer de minimis and lead to deductibility. The 3rd Circuit Court, however, stated that it need not discuss the issues because facts involving more than de minimis third party risks were not before it.

NAIC Limitations Proposal

At the National Association of Insurance Commissioners' fall meeting Sept. 9-12 in Kansas City, MO, a new model act was proposed that would limit fronting arrangements. The act would affect traditional and agent-owned captives and programs placed through admitted carriers that are substantially reinsured with foreign non-admitted carriers.

The proposal would prohibit reinsurance if more than 50 percent of the risk was ceded and certain other conditions were met, or if the policyholder or the producer who controls the business designated the reinsurer.

In addition, reinsurance would be prohibited if the unlicensed reinsurer is affiliated with the policyholder or producer and would allow the regulator with jurisdiction over the licensed carrier to approve the reinsurance.

Such a scenario would occur if it is in the best interests of the licensed insurer, it is contemplated for a legitimate business purpose and it is not an agreement which aids an unlicensed insurer to operate an insurance business in the state. Significant industry opposition to the bill is expected.

RRA Requests Excise Tax Hike

In a letter to Kenneth Giddeon, assistant secretary of tax policy for the Treasury Department, Jack Blaine, president of the Reinsurance Association of America, stated that although the RAA agrees with certain aspects of the report on the excise tax imposed on insurance premiums issued by the Treasury, there were some provisions and assumptions the RAA disagrees with.

The letter reiterates the RAA's position which includes opting for a 4 percent increase in the property/casualty reinsurance excise tax in an amount equal to the tax on direct premiums, the immediate application of anti-conduit rules in all treaties omitting such provisions and the grant of treaty waivers only when the Treasury demonstrates that the exported premium is subject to a reasonable amount of home-country taxation.
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Title Annotation:insurance companies
Author:Wright, P. Bruce
Publication:Risk Management
Article Type:column
Date:Nov 1, 1990
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