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07 August 2020
By Amanda Pletz and Dr. Georg Dettmann
The authors outline that the most important point made in the new guidance is that the OECD requires a comprehensive analysis of the commercial and financial relations among the parties involved in a transaction. The authors also argue that, for the first time, the OECD is providing direct guidance on how to deal with captive (re) insurance arrangements.
The OECD discusses several methods for related-party insurance premiums (such as the CUP, TNMM, or actuarial method). The authors state that when applying these methods, it is important to consider the economically relevant characteristics of the transaction and, to the extent needed, perform necessary adjustments to accommodate for differences. The OECD further highlights that the critical item is the question of whether a risk exists and, if so, if a transfer of risk to the captive insurer has occurred.
The authors conclude by stating that these analyses would not only affect the pricing of the transaction, but also the conclusion if the captive insurance company is in fact operating as an insurance company rather than another form of business.