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Member, Beacon International Group, Ltd.
WASHINGTON—A reinsurance company is entitled to favorable tax treatment even if it takes on just one risk from a primary insurer, as long as the reinsurer assumes risks from other insurers, the Internal Revenue Service says in a new Revenue Ruling.
The IRS in Revenue Ruling 2009-26, issued Tuesday, lays out an example in which a reinsurer, called Z, agreed to reinsure the risks of just one policyholder of an insurer called IC Y. The reinsurer also entered contracts assuming risks from other insurance companies.
Even through the reinsurer’s agreement with IC Y covered only the risks of a single policyholder, it assumed sufficient risks through its agreements with other insurance companies to ensure risk distribution requirement for favorable tax treatment was met, the IRS said.
The IRS, following court rulings, requires risk distribution for an entity to be considered an insurance company.
In another example provided by the IRS in its ruling, Z entered into an agreement with IC Y in which Z took on 90% of the risks on insurance contracts written by IC Y for multiperil business in a 10 state area. In return, IC Y agreed to pay to Z 90% of the premiums it received from policyholders on that business. The contract with IC Y was Z’s only business.
In that arrangement, the risk distribution requirement also was met. Even though the agreement with IC Y was Z’s only business, “the requirement of risk distribution was still met from the standpoint of Z as to each original policyholder,” according to the IRS.
In the ruling, the IRS is saying that “in measuring risk distribution, you treat the reinsurance company as if it were insuring the risks of the direct insureds,” said Chaz Lavelle, a tax attorney with Greenebaum, Doll & McDonald P.L.L.C. in Louisville, Ky.