Point of sale advantage

The Dixons Stores Group (“DSG”) was the biggest retailer of electrical goods in the UK, and sold extended warranties with many appliances. The warranties were re-insured with a captive insurance business in a low-tax jurisdiction. We were instructed to provide an expert witness testimony, assessing the arrangements from a competition economics perspective.

Rewards reached the ‘wrong’ party

The findings from our expert witness testimony revealed that the majority of electrical warranties were sold by retailers of electrical goods and these warranties generated above-normal levels of profit. We found that many insurers could provide the re-insurance that was being provided by the captive insurer as Insurance markets were competitive, and competitive insurance services easy to find. In addition, the high level of overall profit was generated through DSG’s retail “point-of-sale” advantage. There was little genuine risk being faced by the captive insurer, as due to the structure of the contract, the rewards were flowing to the “wrong” party, as revealed by an assessment of which party was actually generating the value.

Redressing the balance

The Court agreed that our findings supported a profit-split analysis, the conclusions of which were that the captive insurance business should earn no more than a normal rate of return. This had the effect of moving a significant amount of profit (and tax) back into the UK.