Tax

[Chaapa]

Hello

I am just a little confused with the tax allowance in pricing.

Assume that a life insurance company only has a BLAGAB fund.

Suppose the company is in XSI position and wants to price a term assurance product (which results in more E than I).

If the company prices the product on XSE basis then does it mean that

a) the company does not allow for the payment of tax in its pricing and also does not allow for any expense relief? If this is the case then should that result in more attractive premium rates as no tax has been allowed and this outweighs the higher expenses allowed for due to no expense relief?

or does it mean

b) the company does allow for the payment of tax in its pricing (since it will have to pay tax as it is in an overall XSI position) but does not allow for any expense relief?

Suppose the company is in XSE position and wants to price a savings contract. As it is overall XSE it will have to use gross assumptions to price the savings contract. Should this mean that the savings contract is more attractive to consumers than a similar contract priced on an XSI basis by some other company (as no tax payment is taken into account)?

Please could someone clarify the above.

Thank you in advance.

 

[Mike Lewry]

Tax allowance in pricing

Suppose the company is in XSI position and wants to price a term assurance product (which results in more E than I).

If the company prices the product on XSE basis then does it mean that

a) the company does not allow for the payment of tax in its pricing and also does not allow for any expense relief? If this is the case then should that result in more attractive premium rates as no tax has been allowed and this outweighs the higher expenses allowed for due to no expense relief?

or does it mean

b) the company does allow for the payment of tax in its pricing (since it will have to pay tax as it is in an overall XSI position) but does not allow for any expense relief?

A product being XSE means it generates more E than I and so generates no taxable amount in its own right. If a company consequently chooses to ignore tax in its pricing model, it will be doing what you say in your first sentence under (a) above. However, since this company is XSI overall, it could allow for the benefit of tax relief that would actually be received on the excess expenses under the product, producing more attractive premium rates than if no tax relief is allowed for.

Suppose the company is in XSE position and wants to price a savings contract. As it is overall XSE it will have to use gross assumptions to price the savings contract. Should this mean that the savings contract is more attractive to consumers than a similar contract priced on an XSI basis by some other company (as no tax payment is taken into account)?

The company does not have to price on any particular set of assumptions. If it chooses to gross assumptions in this case, then yes it would lead to more attractive premium rates, since it is effectively taking credit for excess expenses elsewhere in the tax fund in order to reduce the tax bill in respect of this product.

Tax can be a very complex area, but I hope this helps.

 

[Chaapa]

Hi Mike

Thank you very much for your help. Makes things alot clear.

 

[User 1234]

Tax allowance in pricing


A product being XSE means it generates more E than I and so generates no taxable amount in its own right. If a company consequently chooses to ignore tax in its pricing model, it will be doing what you say in your first sentence under (a) above. However, since this company is XSI overall, it could allow for the benefit of tax relief that would actually be received on the excess expenses under the product, producing more attractive premium rates than if no tax relief is allowed for.


The company does not have to price on any particular set of assumptions. If it chooses to gross assumptions in this case, then yes it would lead to more attractive premium rates, since it is effectively taking credit for excess expenses elsewhere in the tax fund in order to reduce the tax bill in respect of this product.

Tax can be a very complex area, but I hope this helps.

Thanks Mike, so it means that a product being XSE (eg. term product) will result in competitive pricing and hence XSE is a good thing. But I got confused by the ASET solution of 2020Apr Q3(ii) where it says " It may be difficult for companies who only sell this type of product (term being XSE) to complete with other companies whose I exceeds E as the latter can net down their expenses in their premiums. Therefore probably not the most suitable method" It gives me the feeling it's a bad thing again. So I'm not sure whether it's a good thing or bad thing from a product being XSE.

Thanks for a lot for your help in advance

 

[Em Francis]

Thanks Mike, so it means that a product being XSE (eg. term product) will result in competitive pricing and hence XSE is a good thing. But I got confused by the ASET solution of 2020Apr Q3(ii) where it says " It may be difficult for companies who only sell this type of product (term being XSE) to complete with other companies whose I exceeds E as the latter can net down their expenses in their premiums. Therefore probably not the most suitable method" It gives me the feeling it's a bad thing again. So I'm not sure whether it's a good thing or bad thing from a product being XSE.

Thanks for a lot for your help in advance

It will depend on the products sold and whether the company can eventually use the carried forward expenses. If the company only sells term assurance it may be in a situation where it doesn't get the opportunity to actually use these expenses to reduce the BLAGAB income and so will not benefit from this tax relief. Whereas, if the company sold products which generated higher income (ie savings as opposed to protection products) then it is more likely it will be able to net these gains with these expenses and therefore utilise the tax relief which can ultimately be reflected in the premium charged. For highly competitive products, this may be a very important factor as a slight decrease in premium is going to impact the volume of business sold.
Hope this helps.

Thanks
Em