Examiner Reports A2010,S2012: XSI , XSE

[calibre2001]

I'm a bit confused by contradictions on whether XSE results in lower premiums from these 2 examiner reports.

Hope someone could clarify what's going on. Thanks.


In the April 2010 examiner report it is stated:

An XSI position means that it is taxed on all its investment returns and receives tax relief on all its relevant expenses.

When taxed on XSI basis will result in competitive premiums as expenses
receive tax relief.

If the company moves to XSE basis, this may result in uncompetitive premiums as investment income and expenses will be assumed to be gross within the pricing basis.

So there is a risk of reduced volumes of term assurance business being written if the tax basis changes in the long-term.

Seems to imply XSI= relatively cheaper premiums compared to XSE




In the September 2012 examiner report it is stated:

Conversely companies with business producing excess I have a tax incentive to write business producing excess E, so that they can get immediate relief on expenses and thus can write protection business more cheaply.

Here it seems to imply XSE results in cheaper premiums.

 

[Mark Willder]

Whether XSI or XSE results in lower premiums depends on the type of contract we're looking at, so both exam solutions you mention are correct.

If the insurer is XSI, then it will pay tax on I-E and will price using net interest and expense assumptions. This is good news for contracts with high expenses as they are priced on low net expenses rather than high gross expenses. This is bad news for contracts with high investment returns as they are priced on low net investment returns rather than high gross investment returns.

The opposite is true if the insurer is XSE. It will not pay tax on I-E and will price using gross interest and expense assumptions. This is bad news for contracts with high expenses as they are priced on high gross expenses rather than low net expenses. This is good news for contracts with high investment returns as they are priced on high gross investment returns rather than low net investment returns.

Note that these two questions were both set before the new tax regulations came into effect. In the old rules, term assurance business was written in BLAGAB (new TA business is written in OLTB under the new rules). Term assurances have much higher E than I, so would benefit from XSI pricing. However, a company selling large volumes of TA business compared to savings business would probably be XSE.

Under the new rules, almost all policies will have more I than E most of the time and so insurers will be likely to be XSI.

Best wishes

Mark

 

[misterh]

Yes - good question and very good answer I remember I came across this issue also and it was one of the many remaining knowledge gaps I had Will add to my "special" notes
The ActEd notes does allude to the XSI v XSE when explaining the new tax regime and states that it will discuss further when it covers the positions later on in the notes but I definitely think that the notes didn't cover this adequately (along with AoS amongst other things - don't get me started on the AoS notes!!!!!!)

 

[misterh]

One last thing on this - am I right in understanding that there is a bit of a circular reference going on here in that it is better for XSI companies to have high E even though the chances are that with a high E they won't be XSI in the first place. Chances are companies will find themselves in the "bad news" category? Is this correct generally? I presume if yes that this will drive a companies relative product sales?

 

[Mike Lewry]

One last thing on this - am I right in understanding that there is a bit of a circular reference going on here in that it is better for XSI companies to have high E even though the chances are that with a high E they won't be XSI in the first place. Chances are companies will find themselves in the "bad news" category? Is this correct generally? I presume if yes that this will drive a companies relative product sales?

Well, yes, for an XSI company, high E means a lower tax bill, but this is just one part of the picture - don't forget it also means more money leaving the company on expenses in the first place!

But generally, yes, XSI companies have a competitive advantage when writing XSE business, but only up to the point where they cease to be XSI companies. This benefit has been greatly eroded by the recent tax changes for protection business.

However, XSE companies still have a competitive advantage when writing XSI business, but only up to the point where they cease to be XSE companies. It is quite common for companies that find themselves temporarily in an XSE position to write a tranche of life bond business on highly-attractive gross terms whilst they can.