LAM10110 - Reinsurance: Reinsurance of BLAGAB: background to FA12/S57(2)(e) and S90

If the investment risk of BLAGAB is reinsured to a reinsurer taxed on a trade profit basis then the investment return accruing for the benefit of policyholders would be matched by the reinsurer’s liabilities to the cedant. Although the business is still taxed as BLAGAB in the cedant the investment return arising on the reinsured business would be received in the form of a reinsurance claim and therefore excluded from I by FA12/S92(5)(a).

The risk is not confined to intra-group reinsurance arrangements. If a third-party reinsurer does not have to meet the cost of paying tax on policyholder returns this will be reflected in the arm’s length reinsurance premium. This may make it potentially economically attractive for a reinsurer to reinsure BLAGAB business.

Broadly speaking FA12/S57(2)(e) and S90 and the associated regulations ensure that investment return is effectively brought into account either:

• in the cedant, by imputation or directly, or
• in the reinsurer by treating the reinsured business as BLAGAB, i.e. excluded business FA12/S57(3).