"Insurance Risk" as a Tax-Deductibility Requirement

 
Captive Tax Issues | P. Bruce Wright | Partner | Eversheds Sutherland (US) LLP

As touched on in the video "Tax-Deductibility of Captive Insurance Premiums," P. Bruce Wright of Eversheds Sutherland (US) LLP expands on what qualifies as a true insurance risk for regulatory and tax-deduction purposes. One of the most important factors is determining whether or not there is an insurable interest in the risk on the part of the policyholder. An example of this is a building owner who purchases an insurance policy to reimburse for the building's loss in the event that it burns down in a fire. An example where there is no insurable interest is a derivative that hedges against currency fluctuation. Mr. Wright points to several other instances that would not be considered insurance from the point of view of the Internal Revenue Service, including business risks, which are completely under the control of the "insured" (e.g., embedded warranty); residual value insurance (e.g., car lease); and retroactive insurance (i.e., no underwriting risk after a loss has occurred).