General Insurance Reserves

Consultation on Proposals for Regulations

Contents

Introduction

The Budget proposals include changes to reform the tax rules applying to general insurance companies and Lloyd's members to make those rules fairer. As explained in the Inland Revenue Budget Note, the aim of the reform is to bring the tax treatment of general insurance companies and Lloyd's members broadly into line with other companies. Companies other than general insurers must when making long term provisions follow accounting standards which require a best estimate of the relevant liability, discounted where material. The reform therefore seeks the outcome that, in broad terms and whatever its policy on setting the level of its technical reserves, a general insurer will pay tax worth the same to the Exchequer as if it reserves had been set at exactly the right level needed to pay future claims, taking into account a reasonable investment return on the amounts reserved.

The Government's intention is to achieve this tax outcome in a manner which is fair to insurers, can be operated using data already collected for the purposes of the current regulatory framework, and which does not distort the prudent commercial judgement of the optimum level of technical reserves. Clause 106 of the Finance Bill published today provides the powers necessary for this. The Government proposes that Inland Revenue Regulations should set out the detailed mechanism for calculation of the required tax adjustments. This consultation paper is about the mechanism which will be incorporated into secondary legislation. The Government will use the consultation process to ensure that Regulations can be introduced as soon as possible after enactment of the Finance Bill; and that the Regulations, when introduced, meet the aims explained above.

Readers of this document as it appears on the Inland Revenue Website will be able to see illustrations of the way in which the Government proposes the new rules should work. But we recognise that a facility to model the new rules may be helpful. We are therefore providing a file which users may download from the Website. This file contains a copy of the consultation paper in a form which incorporates examples which users can modify to incorporate their own data. To use it, you will need to have Microsoft Excel 97 or later version on your computer.

The downloadable version of this document is available below. In order to read this, you will need Internet Explorer version 4 or later, or equivalent. It is best viewed in at least 800 x 600 screen resolution.

Issues for consultation

The following are the main issues on which the Government would welcome comment on its proposals. Where the description of an issue shows a hyperlink, that link accesses the detailed explanation of the issue.

  1. The Government's view is that is is appropriate to use a rate linked to the rate of interest on medium / long gilts to calculate the discounted value of liabilities. Are there alternatives which might be equally, or more, appropriate?
  2. Does the Government's proposal for a 10-year cut-off for the discounting of very long tail business strike the right balance between simplicity and fairness?
  3. The Government proposes that the new rules should not require tax adjustments where a technical provision is within plus or minus 5% of the discounted value of insurance liabilities to which it relates. What arguments might favour either a narrower or a wider margin of error?
  4. In calculating tax adjustments required if a technical provision exceeds the discounted value of the liabilities to which it relates, the Government proposes to apply a rate of interest linked to that set under Section 87A Taxes Management Act 1970 for unpaid corporation tax. Do respondents agree that the use of that rate, on the basis set out in the explanation of the interest calculation, produces results which achieve the broad parity of tax treatment that the Government is seeking as between insurers and others?
  5. The Government's proposals include making provision for cases in which technical provisions are set at too low a level as well as for cases where provisions are higher than a discounted best estimate of liabilities. Does the even-handed approach proposed lead to any practical difficulties?
  6. The Government proposes that in applying these rules to members of Lloyd's:
    • Adjustments will be made by members rather than in the computation of syndicate profits
    • Members will be excluded from the new rules for syndicate business where the extent of their participation is 4% or less
    • A matrix approach will be used to identify how much of a syndicate's claims in any year are to be allocated to the member for the purpose of calculating the discounted valuation of liabilities

Are any adjustments necessary to these principles to ensure that the Government's aims are achieved in relation to Lloyd's members?

Giving us your views

The Government welcomes views from anyone wishing to respond to the issues raised in this paper. Responses should be sent:

  • By e-mail, to Andrew.R.Page@ir.gsi.gov.uk or
  • In writing to Andrew Page, Inland Revenue, Financial Institutions Division, Room S 20 West Wing, Somerset House, London WC2R 1LB

The deadline for comments is 25 May 2000. Responses will, unless respondents so request, be made available publicly under the principles of Open Government.

Explanation of the Government's proposals

There is a full explanation of the Government's proposals in a separate document which is available for download in two formats.as a compiled HTML file or in Adobe Acrobat PDF fromat. The help file version has interactive features and enables you to do calculations. The PDF version is the same document, but without the interactive calculations feature.

To download/view compiled HTML version, you must have:

Download Government Proposals Proposals Document (Compiled HTML Version) Size 148K

Download Government Proposals Document (PDF Version) Size 442K

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