For 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 up a captive insurance which accepts the risk from all of the subsidiaries and reinsures it with independent reinsurers. By bringing together a portfolio of insurance risks across different geographical zones, the MNE group already represents a diversified risk to the market. The synergy benefit arises from the collective purchasing arrangement, not from value added by the captive insurance. It should be allocated amongst the insured according to the level of premium they contributed.
Chapter X paragraph 10.223
Category: Chapter X: Financial Transactions, E. Captive insurance, E.3. Determining the arm’s length price of captive insurance and reinsurance, OECD Transfer Pricing Guidelines (2017) | Tag: Captive insurance, Financial transactions, Group synergies, Pricing captive insurance« Prev | Next »