From: Captive Review
EY’s Mikhail Raybshteyn, Maureen Nelson and Paul H. Phillips III explore the critical issue at the centre of the heated debate about what constitutes a true captive
Market participants are noting a more reserved approach from the IRS in its challenges of fortuity.
If you think federal tax law addressing insurance is complex and unclear, you should know that understanding it depends on interpreting and applying arguably ambiguous terms.
One such term used to ascertain whether an arrangement constitutes insurance for federal tax purposes is “fortuity”, yet fortuity itself is such an amorphous concept that the term is hard to define.
For almost as long as the Internal Revenue Service (“Service” or “IRS”) has chased after “captive” insurance companies (the Service issued its first revenue ruling dealing with an insurance arrangement with a related insurer, i.e., a captive, in 1977), taxpayers, underwriters, regulators, tax authorities and courts all tried to define and concisely explain what constitutes fortuity, putting their own stamp on what the concept encompasses and what should be or can be considered a fortuitous event.
With the emergence of new risks, the realignment of the global marketplace and an ever-evolving legal space, the understanding of what it really means has also expanded and there is no shortage of schools of thought on the topic.
So, what is this mystical concept so many insurance market participants are wrestling with? In most basic terms, “fortuity” carries the meaning of occurring by chance, being lucky or fortunate. In the context of insurance, it refers to the uncertainty of an event, being unplanned and unintentional in nature, and out of the reasonable control of both the insurer and the insured.
