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FERMA Advises OECD, Further Indicators Not Needed for Captive Insurers

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September 10, 2018

Last week the Federation of European Risk Management Associations (FERMA) responded to the Organization for Economic Cooperation and Development (OECD) concerning the captive insurance aspects of the OECD's public discussion draft document, titled "BEPS Actions 8-10 Financial Transactions," which discusses base erosion and profit shifting (BEPS) and considers the relationship between transfer pricing and value creation.

In its response, FERMA urged the OECD to take advantage of existing accounting and insurance regulations for captive insurers so that the OECD's planned guidelines do not create disproportionate uncertainty and administration for multinational entities. 

More specifically, FERMA called on the OECD to refer to the International Financial Reporting Standards 17 and the International Association of Insurance Supervisors definition of "genuine insurance transaction" and "insurable risks" as part of the guidelines. It also said that current insurance regulations are extremely stringent about the control of various functions of a captive insurer such as direction, underwriting, actuarial, and accounting expertise. Further indicators are not needed, FERMA argued.

"FERMA wishes for OECD to produce final guidance that is clear and robust enough to provide multinationals with some legal certainty in terms of their captives. A further layer of regulations to be applied by national authorities could create a risk of confusion, uncertainty, and ultimately more administration for multinationals and tax authorities without providing the desired outcome for tax authorities," said Laurent Nihoul, FERMA board member with responsibility for captive insurers.

In this paper and its previous June 2017 submission to the OECD, FERMA said it argued strongly that for European multinationals, captive insurance is a risk management tool used to reduce the company's total cost of risk and improve its loss experience through better understanding of claims.

FERMA said it is pleased that captive insurance companies are now more generally perceived as a way for multinational groups to manage risks within the group and that they are a component of a risk and insurance management strategy. It says that the OECD discussion draft also offers a better understanding of captive insurers as small insurance enterprises, especially by suggesting that they are regulated entities and by recognizing there are various types of captive insurers, with an improved understanding of reinsurance captives.

FERMA urged the OECD to continue its dialogue with European multinationals and their risk managers in order to accomplish the following.

  • Further develop understanding about the use of captive (re)insurance companies by multinational enterprises
  • Promote consistency in the way BEPS principles are applied to captive insurers by national authorities
  • Encourage practicality and proportionality in future OECD guidance on captive insurers in the context of the efficiency of multinationals risk management strategy

The full FERMA response as well as the previous June 2017 FERMA information paper on captives, titled "Captives In A Post-BEPS World," may be found on the FERMA website.

 
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