September 2021 Q3 (iv)

[TanishaS]

Hi,
I had the following questions regarding the impact of change from BLAGAB to profit basis
1) What would be the impact of the transfer on shareholders?
2) In case of additional tax being paid by the company, would it pass it onto the policyholder for new/existing business?
3) If the term assurance business is written as a loss-making business, what would be the impact of this transfer?
4) Why would the company consider purchasing another life insurance company or other blocks of business? Would it be only to consider practical help such as system and administration post change?

Thanks

 

[Lindsay Smitherman]

First, it's important to recognise that the change proposed in the question would only apply to new business. (That is stated in the question wording and also makes sense, as it would not be possible to change premium rates on existing business in order to recoup any higher tax being imposed.)

So in answer to 2), it would only be passed on for new business and yes: it would be reflected in the premium rates. As described near the top of page 15 in Chapter 22, the profits would be netted down for tax in the profit test (used in setting the premium rates), and then assessed against the profit criterion. So, assuming that company wants to target the same level of (post-tax) profit as it did before, a change in tax would mean a change in premium rates.

And similarly, in answer to 1), there would be no impact on (post-tax) shareholder profits - provided the same (post-tax) profit criterion was being targeted.

 

[Lindsay Smitherman]

3) If the term assurance business is written as a loss-making business, what would be the impact of this transfer?

If term assurance business makes a loss and 'profit' is now being taxed, there will be no tax payable on the term assurance portfolio.

If the company wrote other business that was taxed on a profits basis (such as pensions, as per the first paragraph of the question) then it would likely be able to offset the losses on term assurance business against the profits on the pensions business, allowing it to pay lower tax on the pensions business than otherwise. In that situation, it would be up to the company to decide whether to pass the benefit of that lower tax to the pensions policyholders or to the term assurance policyholders (or both). However, in the situation described in the question, it doesn't look like the company were are considering does write that kind of business.

 

[Lindsay Smitherman]

4) Why would the company consider purchasing another life insurance company or other blocks of business? Would it be only to consider practical help such as system and administration post change?

These points are about the company taking actions to resolve the issue it now has with its savings product, which will now be taxed on an XSI basis (eventually, once the 'XSE benefit' of the in-force term assurance business runs off). This will mean that this business will become more heavily taxed, making it less competitive. It might have to exit that market completely and so needs to think about what its new product strategy would be, and that might be assisted through a portfolio purchase / M&A activity. [Such activities would also likely impact the overall tax position, once portfolios are merged.]

 

[TanishaS]

change premium rates on existing business in order to recoup any higher tax being imposed.

Thank you for your reply, I have understood it better. Regarding above point, in case the company has reviewable premiums on existing business- would it still not change its premium rates on existing business?

Thanks

 

[Lindsay Smitherman]

In the scenario in the question, the tax rule is only changing for new business going forwards, not for existing business, so there would be no need to change the rates.

Furthermore, having reviewable premiums is fundamentally about being able to reflect changes in underlying experience, particularly mortality / morbidity (not changes in legislation).