More than 50% Third Party Insurance Risk

Revenue Ruling 2002-89 (191 KB) Issued December 11, 2002: 

This ruling discusses two scenarios involving the payment of premiums by a parent to its two wholly-owned PIC subsidiaries. 

In the first scenario, the premiums paid by the parent to its wholly owned subsidiary accounted for 90% of the subsidiary’s income for the year. In the second scenario, the premiums paid accounted for 50% of the second subsidiary’s income for the year. 

In determining whether these scenarios represented valid insurance arrangements, the IRS noted that: 

• Both insurance PICs were adequately capitalized, 
• Both insurance PICs were properly regulated, 
• The companies transacted their insurance business in a manner consistent with the standards applicable to an insurance arrangement between unrelated parties. 

The IRS again focused on the concepts of adequate risk shift and risk distribution and concluded that the arrangement in scenario 1 did not provide sufficient risk shift or distribution while the facts in scenario 2 did. The IRS has concluded that when 50% (or more) of the subsidiary’s risk is with unrelated third parties, then sufficient shift and distribution of risk has passed to the subsidiary to constitute a valid and bona-fide insurance arrangement for the parent.