Reciprocal flood insurance exchange arrangements

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A contract carrier corporation that hauled automobiles from an automobile assembly plant leased land on which it stored the autos and other equipment in Revenue Ruling 60-275. The land was bound by a river and therefore exposed stored property and leasehold improvements to flood damage. Under an agreement with a "reciprocal flood insurance exchange," the company and others subject to flood risk made annual payments for a specified period for flood insurance coverage. The company acquired $150x of coverage underwritten over a ten-year period, of which $15x (ten percent) became effective when the policy was issued and delivered. The company's property subject to flood loss equaled $500x.

The exchange credited one percent of the initial premium to its general reserve fund, which was used to cover certain administrative expenses and losses exceeding the catastrophe loss account. The remainder was allocated to the catastrophe loss account. This account was charged with a pro-rata share of losses occurring during the year and for incurred reinsurance costs, for each subscriber. The company could withdraw amounts credited to its catastrophe loss account after the end of the current policy year, but could not withdraw amounts credited to the general reserve fund (although subscribers shared in the net balance of the general reserve fund, if any, if the exchange terminated).

Ruling requests

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In Revenue Procedure 2002-75, the Service indicated that,

we will now consider ruling requests regarding the proper tax treatment of a captive insurance company.

However, some questions are arising in the context of a captive ruling request are so inherently factual (within the meaning of section 4 .02(1) of Rev. Proc. 2002-3) that contact should be made with the appropriate Service function prior to the preparation of such request to determine whether the Service will issue the requested ruling.

Inquiries regarding whether the Service considers a proposed captive transaction so inherently
factual that it cannot rule, should be directed to Chief, Branch 4 , Office of the Associate Chief Counsel (Financial Institutions & Products) at (202) 622-3970 (not a toll-free call).