Retroactive insurance

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A casualty insurance company provided $30x coverage to an insured in Revenue Ruling 89-96.181 The insured incurred a liability of an unascertained amount as a result of a catastrophe in June 1987 although the underlying facts indicated that the total liability would exceed $130x. The insured subsequently paid $50x to obtain $100x of additional insurance, increasing the coverage for the catastrophe to $130x. The insurer increased its unpaid losses by $100x and deducted the (discounted) present value of the $100x increase in coverage as losses incurred.

The Service ruled that the retroactive arrangement did not qualify as insurance. Risk-shifting was lacking because the catastrophe covered by the contract already occurred. The Service stated that establishing a loss for $100x indicated that the insurer expected to have to pay the additional $100x of coverage. The taxpayer incurred the risk that payments on the contract would be made earlier than expected and that the investment yield for the period from the date that the premium was received until the date the claim was paid would be less than expected, which are investment risks

Reciprocal flood insurance exchange arrangements (Cont)

Airport එකේ කැම්පස් කෙල්ල

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Net earnings (determined after a fee to an attorney-in-fact), if any, were credited to subscribers' individual surplus accounts. A subscriber could elect to apply the unencumbered balance of its account to an annual premium deposit or withdraw it. Subscribers' risks were divided into classes or grouped in accordance with the nature of the business's flood hazard, location, and flood district. A subscriber's catastrophe loss account was decreased by a pro-rata share of the adjusted losses incurred by similarly classified subscribers.

The Service concluded that risk shifting was not present in the reciprocal flood insurance arrangement. A major flood would probably affect all properties in a particular flood basin so that there was little likelihood that the subscribers would share any risk.177 Proceeds received in the event of
flood damage would, in effect, be a return of the subscriber's own money because each subscriber was substantially underinsured.

The non-withdrawable one percent of the premium deposit that was credited to the general reserve fund was for a fixed liability, which was deductible as an insurance expense.178 The Service ruled that an annual premium deposit to the exchange was a nondeductible contingent deposit to the extent that it was withdrawable by the company.179 Earnings from the investment of the funds were taxable when they were credited to an annual premium deposit or became withdrawable.