Parametric tax issues require clarity: VCIA panel
Captive insurers along with other players in the market are increasingly looking to leverage parametric insurance solutions as a way of delivering faster claims payments after an event that covers an insured loss.
However, at a discussion group at the Vermont Captive Insurance Association’s (VCIA) annual conference, audience members made it clear that a number of issues need to be clarified – or at least reviewed and revised – before some are comfortable using these policies.
The discussion group, chaired by Thomas Dawson, partner at McDermott Will & Emery, and Nir Kossovsky, chief executive and director of Steel City Re, agreed that though parametric solutions as an insurance concept have been available for a long time, they remain underutilised.
They are now gaining a broader recognition, they agreed, but they also acknowledged that an important question is whether parametric risk transfer products are, in fact, insurance or a ‘swap’, another form of financial instrument.
As Dawson pointed out, there is little guidance on a federal level on this issue, with no litigation or federal regulation, and no precedent yet established by the Internal Revenue Service (IRS).
The issue is important because, if a contract is considered insurance, certain tax rules apply; if it is considered a swap, that is a regulated investment product with a different set of rules to follow.
The group called for greater clarity on the matter, especially as states like Vermont recently changed their rules to say that parametric risk transfer products are not insurance. Yet in domiciles such as Puerto Rico they are. As a result, companies need to be careful on this matter, the panel agreed.
The group agreed that parametric solutions can be a very valuable tool for a wide range of re/insurers and captives. When such solutions are conceived, parameters are stipulated using data and records to create triggers activated by events of a certain specified kind, which, in turn, result in payment. As Kossovsky put it: “Parametrics are nothing more than a means to insuring a model. A parameter can be the rainfall, a parameter can be the wind, it can be the intensity of the ground shaking.”
A number of members of the group said that, in their experience, parametric solutions had been successful in enabling fast payment. They also stressed that clarity on taxation is needed – if a payout can effectively be claimed back via tax arrangements, that is was an issue for accountants.
The group underlined that absolute clarity was required, in particular by board members or higher executives, on the issue of how a parametric insurance product or some form of parametric risk transfer product is identified and labelled, with full transparency being the key to how it is seen by regulators and the IRS.