Spreading of Risk in Captive Group

Revenue Ruling 2002-91 (175 KB) Issued December 11, 2002: 

The IRS concluded that a group PIC arrangement, which was formed by fewer than 31 unrelated insureds, with each insured having no more than 15% of the total risk, was a bona-fide insurance arrangement. The ruling also outlines other factors that the IRS will consider in determining whether a transaction constitutes a bona-fide insurance arrangement. 

These factors include: 

• Whether the insured parties truly face hazards; 
• Whether premiums charged by the PIC are based on commercial rates; 
• Whether the risks are shifted and distributed to the insurance company, since the entities are commercially and economically related; 
• Whether the policies contain provisions such that the covered risks may exceed the amount of premiums charged and paid; 
• Whether the validity of claims were established before payments are made; 
• Whether the PIC’s business operations and assets are kept separate from the business operations and assets of its shareholders. 

The IRS again focuses on risk shifting and risk distribution in determining whether the transactions are considered deductible “insurance premiums.”