Contributed by ICCIE Board Member and ACI Graduate, Joanne Shaver of Intuitive Companies
Unfortunately, risk pools are getting a lot of negative attention from the IRS following the Avrahami, Reserve Mechanical and Syzygy Insurance tax court cases.
Risk pooling is a standard practice of insurance. It is a way for insurance companies to reduce the financial impact of a loss by spreading the risk amongst a pool of insurers, and creates the “law of large numbers” which is a basic tenant of insurance . Pools that have been organized for captives are known as retrocessional pools. In a pool, the captive cedes (sells) risk to a pool and assumes (buys) risk from the pool by taking back (the retrocession) a quota share of the unrelated risks in the pool. The IRS has issued several Private Letter Rulings recognizing quota share risk pools as insurance for both small and large captives.
In case you weren’t aware, CICA recently published a guidance document for the captive industry on commonly accepted practices for risk pools. If you haven’t had the opportunity to read it, I recommend that you do. There are a number of examples and charts provided in the document which make it easy to understand how different types of quota share pools work.
For your convenience, I’ve included a link to the CICA document at the bottom of this blog. Thanks to CICA and all the contributors who were involved in the process of putting this guidance document together.