Insurance requires the assumption of insurance risk by the insurer. In the event of a claim, the insured does not suffer the financial impact of a potential economic loss to the extent that insurance risk has been assumed by the insurer, because the loss is offset by the insurance payment.
TPG2022 Chapter X paragraph 10.201
Category: E. Captive insurance, TPG2022 Chapter X: Transfer pricing aspects of financial transactions | Tag: Accurate delineation, Actual transaction, Assumption of risk / Risk assumption, Captive insurance, Financial transactions, Group insurance, Risk deversification
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- 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...
- TPG2022 Chapter X paragraph 10.198Captive insurances may be self-managed from within the MNE group, or managed by an unrelated service provider (often a division of a large insurance broker). Typically this management would include ensuring compliance with local law, issuing policy documents, collecting premiums, paying claims, preparing...
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- 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...
- TPG2022 Chapter X paragraph 10.202From the captive insurance’s perspective, the fact that the captive insurance is exposed to the downside outcome of the insured risk and to the possibility of significant loss could be an indicator that the insurance risk has been assumed by the captive insurance....
- TPG2022 Chapter X paragraph 10.199A frequent concern when considering the transfer pricing of captive insurance transactions is whether the transaction concerned is genuinely one of insurance, i.e. whether a risk exists and, if so, whether it is allocated to the captive insurance in light of the facts...