General insurance reserves
As announced in the Pre-Budget Report, the special regime for general
insurers’ technical reserves (in section 107 FA 2000) is being repealed.
This follows consultation during the past year on section 107 and its
The last period of account for which section 107 discounting calculations
are required is the insurer’s last period ending before Royal Assent to the
Finance Act, which is expected to be in July 2007. This is also the last
period for which insurers can make an unlimited disclaimer of technical
reserves for tax purposes under section 107(4). In the case of a calendar
year insurer the last period under the existing regime will therefore be the
period to 31 December 2006.
As a transitional measure, insurers will be able to make a limited
disclaimer of up to 10% of total technical provisions for the first period
ending on or after the day of Royal Assent. In the case of a calendar year
insurer that will be the period to 31 December 2007.
In place of the existing legislation the Government will bring in a
“backstop” provision to enable HMRC to challenge the amount of technical
reserves that are in excess of an ‘appropriate amount’ by reference to facts
known at the balance sheet date. As with a general provision, any
disallowance at the end of a period will reverse at the beginning of the
following period. Detailed rules are expected in secondary legislation later
New “backstop” measure
Although detailed rules are to follow it seems the Government is looking to
take a more actuarial approach to identifying possible cases of excessive
reserving. Part of the new enquiry regime will be an HMRC power to require
an independent expert’s report on the technical reserves, at the insurer’s
expense. Details of how the enquiry regime will operate, and how the
absolute standard will be defined, are however still open to discussion.
The new measure will apply to the same general insurers as the existing
section 107, including controlled foreign companies. So far as Lloyd’s
members are concerned, it will operate at syndicate level and so will
potentially affect all members, not only those that underwrite more than 4%
of a syndicate’s capacity.
The backstop is intended to be triggered only by an HMRC enquiry, and will
not impose any self assessment obligation on insurers. It is also expected
that the backstop would be invoked only in exceptional cases and that the
‘appropriate amount’ should not interfere with provisions that are set with
a reasonable standard of prudence as a modern commercial assessment of the
likely liabilities. However, it is not yet clear how the process will
operate in detail, or how an insurer can have reasonable certainty before
the normal enquiry window closes whether its reserves are likely to be
Consultation on Group relief for general insurers
The government will also consult on the wider issue of group relief rules in
the general insurance sector. This was an issue which was raised as a
consequence of the repeal of section 107(4), which currently gives general
insurers some flexibility to manage losses within a group.
- Repeal of section 107 was
preferable to other options on offer, although section 107(4)
enabled insurance groups to overcome some structural disadvantages
in managing group tax. Insurers now need to consider how best to use
their final opportunities to disclaim technical provisions.
- The proposed ‘backstop’ regime
needs considerable further definition to ensure that it is narrowly
targeted, proportionate and focused on protecting the Exchequer. At
present it is not clear how it will be defined. The aim should be
that it does not cause significant compliance work for most
insurers, and there is a risk in trying to legislate quickly by
Regulations that it will not meet this aim.
- Once the new rules are enacted,
there will be pressure on insurers to be able to justify in their
tax returns that their technical provisions are not excessive. This
may lead to actuarial reviews developing a two-sided element in
future. Insurers may wish to consider the scope of their current
internal and/or external actuarial reviews to help them prepare for
the new regime.
- It is positive
that the Government is willing to consider the group relief position
further in the context of UK competitiveness.