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General (P&C) insurance

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in the Pre-Budget Report, the special regime for general insurers’ technical reserves (in section 107 FA 2000) is being repealed.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 possible replacement.

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 this year.

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 challenged.

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.