U.S. reinsurers affected by IRS revenue ruling

The Internal Revenue Service (IRS) recently ruled that an organization that is the sole purchaser of coverage from an insurer cannot take a tax deduction for the premiums.In the Revenue Ruling 2005-40, the IRS states that insurance must involve risk distribution involving numerous parties, so that one insured is not “in significant part paying for its own risks.” It continues that if no such risk distribution occurs, as when there is only one insured, than the coverage is not considered insurance for federal tax purposes. No risk distribution, according to the new ruling, exists if the insurer covered a second policyholder whose business accounted for 10% of the insurer’s premiums as this will result in an insufficient pool of “other premiums to distribute” to the risk of the insurer’s largest customer.