Mutual insurance: particular types: captive mutual insurers
Many mutual general insurers are dealt with by Local Compliance rather than the Large Business Service. The companies involved are often local in nature or trade-based, specialising in risks peculiar to the trade in question. A genuine mutual concern might be expected to offer competitive premium rates to its members and, taking one year with another, to make little or no underwriting profit, relying on investment income to create an overall profit.
The absence of a tax charge on the underwriting surpluses of mutual concerns has led in some cases to the creation of in house or captive mutual insurers, either in the UK or offshore. Such a captive might underwrite all sorts of risks for group companies while charging possibly excessive premiums for its services and reinsuring the real risks into the commercial market at normal rates. It could thus make large underwriting profits, which might be claimed as exempt. At the same time other group companies might hope to depress their own taxable profits by payment of inflated premiums. The company might also seek a means of converting its taxable investment return into a non-taxable receipt (perhaps through the use of financial reinsurance, see GIM8180). The mutual captive might also lend its surplus funds, interest-free, to group companies.
Such a company, if based offshore, presents a risk that should be considered in the context of the controlled foreign company (CFC) rules described in GIM11080. In addition, the company’s claim to mutual status may be reviewed. In general, it is unlikely that the affairs of a company that is a subsidiary of another will be conducted on a truly mutual basis because the entitlement to enjoy at least part of any surplus will almost inevitably lie with its shareholders. Consequently, the identity between the contributors and participators required for mutuality will not exist. This will be so even if the shareholders and policyholders are the same persons, as the shareholders’ right to participate in profits will accrue to them in their capacity as owners of the business, not in their capacity as participators in a mutual surplus.
Where a mutual insurance company accepts reinsurance it is unlikely that the reinsurance will form part of the mutual activities as the direct insurer is unlikely to be within the circle of mutuality (GIM9010), whether by being a member of the mutual company or otherwise. The business of accepting reinsurance rarely displays mutual character.
Outwards reinsurance may be a different matter. It is again unlikely that the reinsurer will be a member of the mutual company, or otherwise within the circle of mutuality, but the purpose of outwards reinsurance is to share large risks, rather than to earn a surplus for division among the company’s members. It is a normal cost to the business. So the fact that a mutual concern reinsures some of its risks should not be generally be seen as prejudicing the mutual status of the business.
On the other hand, if it appears on enquiry that the outward reinsurance is deliberately arranged as a consistently exceptionally profitable, rather than ordinary commercial, activity it ceases to be an ordinary cost to the business. This is likely to be a particular risk with some kinds of financial reinsurance or intra-group reinsurance ceded by a mutual parent to a non-mutual subsidiary. In that case it becomes something that, by itself, gives rise to a trading profit, and the case for taxing it will be reviewed. It may be derived from a severable non-mutual activity, or even, in an extreme case, have the effect of depriving the activities as a whole of their mutual status. Reinsurance arrangements between a proprietary company and a mutual insurer in the same group may be susceptible to the application of the transfer pricing legislation, as not consistent with an arm’s length price (see GIM8340).