b'Taxterminating its pre-existing, active conduct of anmanagement is not a core function for a reinsurance insurance business. This language and the rule whichcompany to the extent the ceding company has prohibits the corporation from entering into anyagreed to retain that function. The regulation also insurance contracts other than contractually obligatedspell out which elements of management and renewal of an existing contract suggest that theoversight must be performed daily and which must runoff-related circumstances 10% test is not avail- be performed on a regular basis.able to foreign insurance companies that acquireThe active conduct percentage test is more portfolios in the runoff through loss portfolio transac- objective and may be more appropriate for smaller tions. The final regulations expand the availability ofcompanies. The test requires the qualifying insur-the exception to include companies that were termi- ance company to measure the total costs incurred nating their business pursuant to a court orderedfor services by officers, employees or others for all receivership proceeding. The proposed regulationscore functions other than investment activity. To limited the exception to insurance companies termi- pass the test, the portion of the cost performed by nating their business under the supervisions of anofficers or employees must equal or exceed 50% of insurance regulator. The final regulations deleted thethe total cost, and the officers and employees with requirement of the 2019 proposed regulations thatexperience and relevant expertise must supervise the runoff company have a plan of liquidation. the person that performs the outsourced functions, Active Conduct of an establish performance standards for outsourced Insurance Business function and vigorous guidelines which are routinely evaluated and updated.In addition to meeting the qualifying insuranceBoth the factual requirements test and the active company test, a foreign insurance company mustconduct percentage test include officers and also meet the active conduct of an insuranceemployees of related entities as the insurance business test to qualify for the section 1297(b)(2)(B)companies officers and employees in certain circum-exception. Because of the substantial changes to thisstances. The related entity must be 50% owned by test compared to the test in the 2019 proposedthe insurance company or under 50% common regulations, the Service and the Treasury re-pro- ownership. The insurance company must either pay posed this regulation in Proposed Regulationsdirectly the compensation costs of the related 1.1297-5. The new proposed regulations giveentities officers and employees for their services to foreign insurance companies the option to meetthe insurance company, or reimburse the related either of two tests, a factual requirements test or aentity for the arms length cost of the services more objective active conduct percentage test. performed by its officers and employees.The factual requirements test requires the com- The proposed regulation adds two exceptions to panys officers and employees (i) to carry outthese rules. A foreign insurance company will not substantial managerial and operational activities onbe treated as engaged in the active conduct of an a regular and continuous basis with respect to theinsurance business if it has no employees, or only a companys core functions, and (ii) to perform virtu- nominal number of employees and relies almost ally all of the active decision making functions withexclusively on independent contractors to perform respect to underwriting on a contract by contractits core functions. For this purpose officers or basis. The regulations define the core functions asemployees of related entities will not be treated as underwriting, investment, sales and contract andindependent contractors. The regulation also claims management, except that contract and claims 106 GLOBAL INSURANCE INDUSTRY|YEAR IN REVIEW 2020'