[Opinion] Insurance and Reinsurance Sector – Transfer Pricing Interplay

Parag Gor – [2024] 168 taxmann.com 493 (Article)

Insurance plays a critical role for global economies. The ecosystem comprising Life Insurance, General Insurance, Re-insurance, Retrocession, and Insurance Intermediaries enables efficient and balanced risk transfer. The Insurance and re-insurance sector contribute to national GDP through rationalized investments of insurance premium collected from large-sized insured population base. The Government of India has been proactive in taking positive policy measures such as increasing the Foreign Direct Investments (“FDI”) limit from 49% to 74% and permitting 100% FDI in Insurance Intermediaries under the automatic route subject to verification of conditions laid down by the Insurance Regulatory Development Authority of India (‘IRDAI’).

The insurance/re-insurance business is highly regulated and locally controlled. While traditional insurance entities (Life and non-Life) are incorporated as Joint Ventures (‘JV’) with global insurance players because of the maximum 74% FDI limit, global re-insurance companies have been permitted to establish branches, commonly known as Foreign Re-insurance Branches (‘FRBs’), after the regulatory amendment in 2015.

FRBs are required to file income tax returns and undertake Transfer Pricing (“TP”) compliances, being non-resident constituent entities of multinational groups. TP issues in insurance/reinsurance sector have been gaining prominence with liberalised inbound cross-border investments, stringent corporate governance norms, complex issues such as attribution of profits to permanent establishments (‘PE’), integrated transactions, role of intangibles and due to global practices/controversies. The timeless principles of insurance such as indemnity and subrogation, also have an interplay with TP issues as they deal with the quantum of liability on the part of the insurer.

In recent times, the IRDAI has granted licenses to new generation “InsureTech” start-ups aiming towards building innovative product solutions and distribution through technology-led platforms. The Indian government has also been promoting offshore financial operations in the IFSC GIFT city. Efforts have been made to bring in global insurance/re-insurance players and offshore funds for starting operations in the IFSC GIFT city, by offering favorable tax regime and fiscal benefits. The International Financial Services Centres Authority (‘IFSCA’) has notified various regulations to achieve the objective of developing IFSC GIFT city as a hub for global re-insurance. Separate regulations are notified to provide framework1 for the recognition and operation of Global In-house Centres (‘GICs’) in IFSC.

Multinational enterprises (‘MNEs’) in the insurance sector leverage their positions to tap worldwide market potential. Typical business models adopted in the insurance sector are:

• Hub and Spoke: The ‘Hub and Spoke model’ is adopted with the objective to effectively manage capital, compliances, streamline operations and for the consolidation of underwriting into a single platform for reducing cost and attain efficiencies. The global/regional HO (‘Hubs’) are responsible for setting overall business strategies and underwriting framework within which local entities operate. The role of subsidiaries or branches (‘Spokes’) may include maintaining customer relationship, delegated underwriting authority arrangements to bind customers within underwriting limits/framework authorised by the Hubs.
• Managing General Agent (‘MGA’): The HO/principal insurer is responsible for overall strategic and underwriting functions. MGAs or cover holders are delegated underwriting authorities to conclude insurance contracts on behalf of the insurer with full or limited authority. MGAs may also undertake support functions as claim management under delegated authority basis.

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