Posted in News on 04 Dec 2018

In September 2018, the Organisation for Economic Co-operation and Development (OECD) published a draft discussion paper on the transfer pricing aspect of financial transactions as part of the Base Erosion and Profit Shifting initiative (BEPS).

With a focus on Multi National Enterprises (MNEs) and intra-group transactions the discussion paper invited comments from the industry for the paper’s section on captive insurance companies. The OECD also debated the difference between risks the insured has no control over (such as property damage), and those where there is an element of control (such as product recall) to consider if insuring such risks in a captive can be considered ‘real’ insurance with risk transfer.

In fact, the vast majority of insurance contracts have an element of control for the insured. Risk managers across all industries will often point to self-insurance as a motivating factor to reduce claims by the introduction of formal health and safety training and enterprise-wide risk management practices.

The OECD paper [1] recognises that captives can be established and used for various commercial reasons including:

  • Tax and regulatory arbitrage
  • Access to reinsurance markets
  • Risk retention (when retaining risk ‘in-house’ is considered more cost effective)
  • Obtaining insurance coverage for certain risks considered difficult or impossible in the commercial insurance market.

Download the Alesco OECD Captive Insurance BEPS Insight Report