20 June 2017
Reporter: Becky Butcher

FERMA releases BEPS guidelines for captives

The Federation of European Risk Management Associations (FERMA) has released guidelines for captive insurance and reinsurance arrangements to ensure a consistent implementation of the Organisation for Economic Co-operation and Development’s (OECD) recommendations on base erosion and profit shifting (BEPS).

The guidelines have been put in place to support national administrations when transposing BEPS actions into their national laws.

They cover three areas, commercial rationale, substance and governance, and transfer pricing—all areas that were questioned by OECD members during the implementation stage of the BEPS actions published in 2015.

The aim of the report is to allow OECD members to assess the compliance of captive insurance and reinsurance arrangements with the BEPS recommendations.

Some of the recommendations FERMA suggested around commercial rationale are for the captive owner to provide a total cost of risk analysis showing how the captive framework can reduce the total cost of risk for its parent group; having a total premium statement; and producing a risk-bearing capacity analysis, as well as other analysis and justifications.

Around substance and governance, FERMA recommended that the captive board of directors meet in person within the captive jurisdiction at least twice a year, with the captive board comprising a minimum of 3 people, with at least one director to be located within the captive jurisdiction.

The final area of recommendations was around transfer pricing. FERMA split this into three sections, one for captives acting direct insurers, one for captives acting as reinsurers and one for the subsidiaries.

For a captive acting as a direct insurer, the association recommended that there should be either a documented and transparent premium-setting process, market quotes from third-party insurance or reinsurance companies, or benchmarking analysis and a model-based technical premium using standard actuarial methodologies.

For a captive acting as a reinsurer, FERMA advised providing evidence that reinsurance pricing follows the fronting insurer’s pricing, market quotes from third party insurance or reinsurance companies and model-based technical premiums.

Finally, FERMA suggested that subsidiaries should have a documented and transparent premium allocation model based on their type of activity, legal environment and exposure measure.

Jo Willaert, president of FERMA, commented: "The objective of such guidelines is mainly to avoid creating a patchwork of diverging national legislations inspired by BEPS. Captives serve an important enterprise risk management role with true business purposes for European businesses and other organisations.”

“Although captives are only a very small portion of BEPS, FERMA believes that national authorities should be guided in how to assess captive arrangements according to BEPS recommendations."

Carl Leeman, FERMA board member and leader of the captive project group, stressed that the document “demonstrates that the main financial ratios of the captive insurance industry are in line with the traditional insurance market”.

Leeman added: "The paper, enriched and approved by our 22 national associations, represents a strong consensus within the European risk management community on how captives are supporting the operations of their parent organisations."

Click here for more information and to find the full FERMA report.

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