(n) Insurance pools and “group captives”
Risk shifting and distribution may be present if an insurance company is owned by numerous unrelated companies and the insurer only covers members of that group. Indeed, in the extreme, a mutual insurer can be viewed as a group captive because the insurer provides
coverage only for its owners. In Revenue Ruling 78-338, the Service concluded that a
foreign insurance company owned by 31 unrelated (shareholder) corporations
qualified as an insurance company.
No shareholder had a controlling interest in the company and no shareholder’s individual coverage exceeded five percent of the total insured risks. The arrangement satisfied the risk
shifting and distribution requirements because the shareholder-insureds were unrelated and the economic risk of loss could be distributed among the shareholders that comprised the insured group.
The Service applied the principles of Revenue Ruling 78-338 in Letter Ruling 9642028, in which an assessable mutual insurance company was owned by 34 mutual funds and two foreign companies that operated in a “manner intended to qualify as a regulated investment company [under the Internal Revenue Code].” Each fund was a money market fund that
invested in short-term securities. Although each of the 3 6 funds was a “Name X” mutual fund, none of the funds was controlled by the parent company of the Name X consolidated group. No single investor directly or indirectly beneficially owned as much as one percent of the aggregate value of the stock of all of the funds.
The funds proposed to establish a mutual assessable insurance company to insure against default risks on the assets held by each of the funds. The insurer would cover losses on insurable assets arising from the nonpayment f principal or interest, and other specified financial risks.
