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A longstanding policy may be ignored if the experience rating
formula in effect allows the parties to tailor income, expense,
and profit allocation on an individual contract basis. Id.
Respondent notes that the Agreements arose from a new
relationship, and that the duration of the 1988 Agreement was
approximately 6 months. According to respondent, these facts
demonstrate tax avoidance effect. We disagree. Although the
Agreements arose from a new relationship, the Agreements were
unlimited in duration, and petitioner could not unilaterally
terminate them. Although the Agreements proved to be of a
relatively short duration, this was due to Guardian’s decision to
recapture the underlying insurance, a decision over which
petitioner had no control. The Agreements also contained no
experience rating provision that allowed the parties to tailor
results on an individual contract basis.
This factor favors petitioner.
v. Right To Terminate and Consequences of Termination
The existence of a payback provision that protects a
reinsurer from losses on early termination of the reinsurance
agreement following the payment of a large up-front ceding
commission, but before the reinsurer has been able to enjoy the
future profit stream, may be a reasonable business practice and
should not automatically be viewed as having a tax avoidance
effect. On the other hand, a payback provision which allows a
reinsurer to recover all of its losses in any case, through
adjustments in future premiums or specific termination
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