Hi Can anybody explain the solution to Q9.6 in the course notes? ie when calculating premium rates why should a proprietary use gross investment returns whereas a mutual net returns as both are taxed on investment returns
I think what this really means is that a proprietary is taxed on profits, so tax should only be taken into account in pricing when assessing the profit requirement otherwise you would be double counting. It does not mean that investment returns are not taxable- they are taken into account when assessing the taxable profit so they are taxable indirectly. Anyone to confirm?
Thanks for your replys. Just to clarify then... By using gross investment returns in premium calculation you charge policyholder a lower premium by giving additional credit for that part of the investment return that is actually paid out by proprietary in tax. Using a gross profit loading then offsets this to some extent and balance is policyholder's contribution towards proprietary's corporation tax liability ie excess of that part of profit loading covering tax over that part of investment return paid out in tax. A mutual uses net investment returns and net profit loading so this issue doesn't arise. In other words, you must be consistent and use either net returns and net profit loading or gross returns and gross profit loading. Is that about right?!
Looks like you've all sussed it out by yourselves! Don't forget that in the great scheme of things, the tax on investment return is a relatively minor issue - even for long-tailed lines of business. There are much bigger drivers of premium rates - for example the uncertainty of the eventual outcome (which will drive the 'profit and contingency margin') - one of the biggest drivers of premium rates in the current UK climate.
