When no tax deductions are allowed if risks are not transferred, whereas premiums paid to insurers are tax deductible, this leads to the formation of:
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A. B. C. D.C
The correct answer is C. Captives.
Captives are a type of insurance company that is set up by a parent company to insure its own risks. Instead of purchasing insurance from a commercial insurer, the parent company sets up its own insurance company, which is known as a captive insurer. The parent company pays premiums to its captive insurer, and in turn, the captive insurer provides insurance coverage for the parent company's risks.
In some cases, tax deductions may not be allowed if risks are not transferred, meaning that the parent company cannot deduct the premiums it pays to its captive insurer for tax purposes. However, premiums paid to commercial insurers are typically tax deductible. This tax advantage can be a key motivation for setting up a captive insurer.
In contrast to fronting, which involves using a commercial insurer as a front for a captive insurer, captives are stand-alone insurance companies that are wholly owned by the parent company. Captives allow the parent company to retain greater control over its insurance program, as well as potentially benefit from tax advantages.
In summary, when tax deductions are not allowed for premiums paid to captive insurers, while premiums paid to commercial insurers are tax deductible, this can lead to the formation of captive insurers.