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.
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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
Last edited by a moderator: Sep 22, 2020