Taxation on Product Pricing - XSE and XSI

[Tha73]

Hi,

This is based on the answer to the question 1.5 of Part 1

I do not understand the following point made in the answer
" if the company were XSI, but the term assurance were priced on XSE basis, then they would lead to a tax profit since tax relief is available on expenses, but not being passed on to policyholders through through lower premium"

This company is a Mutual Life Insurer

As I understood, when XSI - ie I - E>0, the company is taxed and this will be reflected in the premium when priced at this basis
When XSE - ie I - E <0 - there will be a tax relief and company is not taxed for the current year and excess is carried forward to next year.

Could you please explain the above paragraph for me please?

Thank You
Thanuja

 

[mugono]

Hi

I'll give this a go

If the mutual was XSI then they would pay tax on their 'I' and receive relief on their 'E'.

If the mutual then prices their term assurance on an XSE basis they have priced assuming both I and E are received gross.

I think the key point is that for term assurance this product tends to produce a higher E than I. The reserves on term assurance is low so investment income won't be 'large'. The implication from this is that they effectively charge their customers the full E but are able to claim back E*t where t = tax rate.

Put another way, the insurer should in theory charge the customer E*(1-t) in expenses but have decided to charge the full E and keep the tax savings,E*t, (from being XSI overall) as profit.

Hope that makes sense, questions welcome

 

[Tha73]

Hi

I'll give this a go

If the mutual was XSI then they would pay tax on their 'I' and receive relief on their 'E'.

If the mutual then prices their term assurance on an XSE basis they have priced assuming both I and E are received gross.

I think the key point is that for term assurance this product tends to produce a higher E than I. The reserves on term assurance is low so investment income won't be 'large'. The implication from this is that they effectively charge their customers the full E but are able to claim back E*t where t = tax rate.

Put another way, the insurer should in theory charge the customer E*(1-t) in expenses but have decided to charge the full E and keep the tax savings,E*t, (from being XSI overall) as profit.

Hope that makes sense, questions welcome

Thank you very much. This answer really helped