Captive insurances may be subject to regulation in the same way as other insurance and reinsurance companies. The precise requirements of insurance regulation will vary from one jurisdiction to the next but typically include certain actuarial, accounting and capital requirements. While insurance regulation is intended to protect policyholders, local regulators may impose a lighter regulatory regime where the captive insurance provides insurance exclusively to members of the MNE group.
TPG2020 Chapter X paragraph 10.192
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By OECD
Category: OECD Transfer Pricing Guidelines (2017) | Tag: Captive insurance, Definition of captives, Financial transactions
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- TPG2022 Chapter X paragraph 10.193There are multiple reasons for an MNE group to use a captive insurance such as: to stabilise premiums paid by entities within the MNE group; to benefit from tax and regulatory arbitrage; gaining access to reinsurance markets; mitigating the volatility of market capacity; or because the MNE group considers that...
- TPG2022 Chapter X paragraph 10.222Where a captive insurance is used so that the MNE group can access the reinsurance market to divest itself of risk through insuring risk outside the MNE group, whilst making cost savings over using a third party intermediary, by pooling risks within the MNE group, the captive arrangement harnesses the...
- TPG2022 Chapter X paragraph 10.200In order to consider the transfer pricing implications of a transaction with a captive insurance, it is first necessary to identify the commercial or financial relations between the associated enterprises and the conditions and economically relevant circumstances attaching to those relations in order that the actual transaction is accurately delineated....
- TPG2022 Chapter X paragraph 10.203Insurance also requires risk diversification. Risk diversification is the pooling of a portfolio of risks by which the insurer achieves an efficient use of capital. Large commercial insurers rely on having sufficiently large numbers of policies with similar probabilities of loss to allow statistical laws of averages to apply and...
- TPG2022 Chapter X paragraph 10.221It is important to recognise that the capital adequacy requirements of a captive insurance are likely to be significantly lower than an insurer writing policies for unrelated parties. This factor should be considered and, if necessary, adjusted for in order to determine the appropriate level of capital to use when...
- TPG2022 Chapter X paragraph 10.215In accurately delineating fronting arrangements, the same principles stated for captive insurance apply. It is important to note, however, that fronting arrangements represent particularly complex controlled transactions to price as they involve the participation of a third party that is indifferent to the levels of the price of the insurance...
- TPG2022 Chapter X paragraph 10.214A reinsurance captive is a particular type of captive insurance which does not issue policies directly but operates as a reinsurance under an arrangement known as “fronting”. Captive insurance may not be able to underwrite insurance policies in the same way as traditional insurance companies. For instance, certain insurance risks...
- TPG2022 Chapter X paragraph 10.220The remuneration of the captive insurance can be arrived at by considering the arm’s length profitability of the captive insurance by reference to a two staged approach which takes into account both profitability of claims and return on capital. The first step would be to identify the captive insurance’s combined...
- TPG2022 Chapter X paragraph 10.223For example, a manufacturing MNE group has 50 subsidiaries in different locations around the world, all in locations with substantial risk of earthquake, each insures against earthquake damage at its manufacturing plant, with each plant in a different location, assessed on its individual level of risk. The MNE group sets...
- TPG2022 Chapter X paragraph 10.219Alternatively, actuarial analysis may be an appropriate method to independently determine the premium likely to be required at arm’s length for insurance of a particular risk. In setting prices for an insurance premium, an insurer will seek to cover its expected losses on claims, its costs associated with writing and...