The new shadow insurance system | Nick Shaxson

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The new shadow insurance system | Nick Shaxson

Nick Shaxson links to this NYT article and explains a little about the shadow insurance system and the way big corporations set up captive insurance subsidiaries to insure themselves.

But there is another reason why this industry started off: tax. The basic principles are very simple: you can play what are called “transfer pricing” games. Here’s how it might work, in principle.

Big Oily, a firm headquartered in the U.S., sets up a captive insurance subsidiary in Bermuda. Big Oily Bermuda insures Big Oily U.S., and charges vast premiums to Big Oily U.S. These premiums mean that Big Oily Bermuda is massively profitable. But because it is in Bermuda, it pays no tax on those profits. Meanwhile, Big Oily U.S. offsets those massive insurance premiums against its U.S. tax bill.

Hey presto! A big tax bill has disappeared. (Note that nobody has made anything better or more efficient here. All that has happened is a big transfer away from taxpayers to Big Oily’s shareholders.)

Anyway, these two main attractions – lax regulation, and tax shenanigans – meant that companies dived into the business of captive insurance.

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Donagh is the editor of Irish Left Review. Contact Donagh through email: