LAM01120 - Introduction and long-term insurance business overview: commercial background to the tax regime

The tax and regulation for life companies have been subject to major changes, with the new life tax regime effective from 1 January 2013 and the new Solvency II (SII) regime effective from 1 January 2016. Changes in tax, regulation and accounting can impact significantly on the mix and type of life products sold.

Regulation has in recent years driven significant changes to distribution models with the reward for insurance intermediaries moving from commission payments from insurers to fee based charges to customers.

Changes to the rules governing tax favoured pensions have had a dramatic impact on the market for annuity products and for pension products generally, which have been a significant part of the traditional life insurance market. In particular, the withdrawal of the requirement to purchase an annuity with the proceeds of a pension policy in 2015 severely impacted the market for pension annuities. Reductions in the amount of pension contributions that are tax deductible and the introduction of automatic enrolment of employees in pension schemes have impacted the shape of the pensions market.

Capital requirements are of critical importance for life companies given the long-term nature of the business and this influences product design and volume. Changes in the regulatory regime, such as the introduction of SII on 1 January 2016, often impact on commercial activity. SII, for example, meant that some products, such as annuities, required more capital than previously was the case making these less attractive products and contributing to the reduction in the number of participants in the market.

Capital requirements can also influence or drive corporate structure and intragroup transactions, such as reinsurance. Further comments on this aspect are included in the reinsurance chapter LAM10000 and the international chapter LAM12000. Regulation has also been a factor in driving consolidation in the sector, with life groups being taken over, and specialist life company ‘consolidators’ acquiring existing books of traditional life policies. As a result, there has been a steady flow of transfers of business between life companies which generate particular tax consequences. These are explained in LAM13000.

The new life tax regime is simpler than the previous regime, with less scope for outcomes that are not aligned with the underlying economic position. However, where the life company is chargeable to tax on I-E profits, the tax regime is still potentially complex. This is particularly the case where there is a range of products types and a wide range of types of investment vehicles.

Accordingly, to adequately risk assess a life insurance company writing BLAGAB an understanding is required of:

• The accounting, regulatory and commercial context – explained briefly above
• The interaction between tax on the company trade profits, the tax on ‘policyholders’ investment return’ (also taxed in the company) and the taxation of the products in the policyholders’ hands
• The taxation of investment vehicles generally. Life companies are major investors across a wide spectrum of investment types. The tax treatment of returns from investment vehicles is set out in the Savings and Investment Manual (SAIM). LAM03040 covers the position where special rules apply to investments made by life companies