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Member, Beacon International Group, Ltd.
WASHINGTON—The Internal Revenue Service has affirmed the tax treatment as insurance of two programs in which captives ultimately reinsure a portion of risk initially transferred by a pool of entities to a fronting insurer.
The IRS did so in a private letter ruling on Dec. 11, Charles J. Lavelle, federal tax team chair and insurance industry team chair at the Louisville, Ky.-based law firm of Greenebaum Doll & McDonald P.L.L.C., said Monday.
“I don’t think this plows any new ground, but it’s always nice to confirm something people thought would be the case,” Mr. Lavelle said.
The ruling affected a number of operating entities that placed various risks through the same fronting insurer, he said. The fronting insurer retained the upper layer of the exposure and ceded the lower and middle layers to a reinsurer referred to as Reinsurer A, according to the IRS document.
Reinsurer A subsequently kept the lower layer and reinsured the middle layer to Reinsurer B, with Reinsurer B ceding a portion of the exposure through a quota-share arrangement to the captive.
“The ruling says two things,” Mr. Lavelle said. “It says that the reinsurance to the (captive) is insurance, and then that the captive—because the only thing it does is insurance—is insurance as well.”
A second private letter ruling issued by the IRS the same day affirmed the tax treatment as insurance of a similar captive program.