The Organisation for Economic Co-operation Development (OECD) has published a discussion draft on financial transactions for public comment.
The document provides an interesting insight into OCED’s view on dealing with financing transactions, the direction OECD countries may take on domestic legislation and guidance on the application of arm’s length principle to a range of intragroup transactions where international guidelines have been mostly non-existent in the past.
One of the key features covered in the discussion is captive insurance, specifically the characteristics of captives and arm’s length pricing approaches which can be applied to such transactions.
The guidance on captives outlines two attributes that are necessary for an insurance business, the assumption of risk by the insurer, and the distribution or pooling of a portfolio of risk.
Additionally, it states that in the event a captive doesn’t demonstrate the latter, it may not be characterised as carrying out insurance business.
The discussion draft also focuses on arm’s length pricing approaches in relation to captives, advising that when applying the principle to determine the remuneration of captive insurers the differences on account of capital adequacy between captives and arm’s length insurers should be considered.
In a blog post discussing the draft, Rachit Agarwal, Randall Fox and Joel Cooper from DLA Piper note that “when highly profitable insurance contracts are sold by sales agents to customers, the ability to achieve a higher return is attributed to customer contacts at the point of sale”.
“In this regard, the captive insurer should earn a benchmarked return based on returns of comparable insurers and the residual profit should be attributed to the sales agent for access to the customer at the point of sale.”
