GIM9140 - Mutual insurance: particular types: captive mutual insurers

Many mutual general insurers are dealt with outside the specialist Large Business Service. The companies involved are often local in nature or trade-based, specialising in risks peculiar to the trade in question. A genuine mutual concern might be expected to offer competitive premium rates to its members and, taking one year with another, to make little or no underwriting profit.

The absence of a tax charge on the underwriting surpluses of mutual concerns has, however, led, in some instances, to the creation of “in house” or “captive” mutual insurers, either in the UK or offshore. Such a captive might purport to underwrite all sorts of risks for group companies, but charge excessive premiums for its services, reinsuring the real risks into the commercial market at normal rates. It could thus make large underwriting profits, which are claimed to be exempt. At the same time other group companies would hope to depress their own taxable profits by payment of the inflated premiums. The company might also seek for a way of converting its taxable investment return into a non-taxable receipt (perhaps through the use of financial reinsurance as described in GIM8180. The mutual captive might also lend its surplus funds, interest-free, to group companies.

Such a company, if based offshore, should be considered in the context of the CFC rules described in GIM11080. In addition the company’s claim to mutual status is likely to require careful scrutiny. In general, it is very unlikely that the affairs of a company that is a subsidiary of another will be conducted on a truly mutual basis, since the entitlement to enjoy at least part of any profits that the company may make will almost inevitably lie with its shareholders. Consequently, the identity between the contributors and participators that is central to mutuality will not exist. This will be so even if the shareholders and policyholders are the same persons, since the shareholders’ right to participate in profits will accrue to them in their capacity as owners of the business, not in their capacity as participators in a mutual surplus.

Where a mutual insurance company accepts reinsurance it is unlikely that the reinsurance will be part of the mutual activities as the direct insurer is unlikely to be within the circle of mutuality, whether by being a member of the mutual company or otherwise. Problems may also arise with reinsurance that is ceded. It is again unlikely that the reinsurer will be a member of the mutual company or otherwise within the circle of mutuality. In general, however, the purpose of outward reinsurance is to “lay off” large risks, rather than to earn a surplus for division among the company’s members. The mere fact that a mutual concern reinsures some of its risks should not be seen as calling the mutual status of any part of the trading activity into question. The reinsurance is simply a cost of running the mutual business.

However, if it is apparent, on investigation, that the outward reinsurance is a purposely and consistently profitable activity it cannot be viewed as a mere cost. This may be the case with some kinds of financial reinsurance or with intra-group reinsurance ceded by a mutual parent to a non-mutual subsidiary. In that case it becomes something that, by itself, gives rise to a trading profit, and the case for taxing the profit should be considered. It may be derived from a severable non-mutual activity, or even, in an extreme case, have the effect of destroying the otherwise mutual status of the trade as a whole. It may also be possible to challenge dubious reinsurance arrangements between a proprietary company and a mutual insurer in the same group by use of the transfer pricing legislation (see GIM8340).