The primary factors that the Service and courts examine to determine whether a transaction is insurance are whether the policyholder transfers insurance risks to a separate entity (risk-shifting) and whether such entity spreads the risks with risks transferred by others (risk-distribution). The Service and courts also attempt to determine whether the transaction has other characteristics traditionally associated with insurance.
Whether a given factor is present or required for a given transaction to qualify as
insurance for tax purposes is not always definitively clear and a source of considerable contention between insurers and the government in certain contexts.
Risk-shifting—Risk-shifting involves one party “shifting its risk of loss to another.”12 The Joint Committee on Taxation stated13 that the, concept of risk-shifting refers to the fact that a risk of loss is shifted from the individual insured to the insurer (and the insurance pool managed by the insurer).
For example, under a fire insurance policy, the property owner’s risk of loss from a fire (and the resulting damage costs) is shifted from the owner to the insurance company to the extent that the insurance proceeds from the contract will reimburse the owner for that loss.
