Insurance company ceding 100% risk not entitled to unearned premium reserve 

September 4: The IRS issued a technical advice memorandum (TAM) which concludes that a property and casualty insurance company that ceded 100% of the risk on certain contracts was not entitled to carry an unearned premium reserve (UPR). TAM 201235011 [PDF 60 KB] (posted August 31, 2012, and dated May 3, 2012).

*TAMs, like private letter rulings and field service advice memoranda, are taxpayer-specific rulings furnished by the IRS National Office in response to requests made by taxpayers and/or IRS officials. Pursuant to 26 USC 6110(k)(3), such items cannot be used or cited as precedent. Nonetheless, TAMs can provide useful information about how the IRS may view certain issues.


The TAM cites Reg. section 1.832-4(a)(8) to support its conclusion, focusing on Reg. section 1.832-4(a)(10), Example 9, for the proposition that the UPR is reduced by the percentage of the risk reinsured.


In the factual situation addressed in the TAM, 100% of the risk was reinsured, and thus the IRS opined that the unearned premium needed to be reduced by 100%.


The TAM also stated that the risk of having to refund premiums is a business risk and is not insurable or reinsurable, citing Helvering v. LeGierse, 312 U.S. 531 (1941), and Rev. Rul. 89-96, 1989-2 C.B. 114. It is unclear how the facts of these two authorities relate to the facts in the TAM.




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