Tax and technical provisions

Not a silly question!

You don't have to hold technical provisions against future shareholder profits, so the only allowance for tax would be for the policyholder tax part (on I-E) for BLAGAB products.

Simplistically, a company which is XSI and expects to remain so could use netted down expenses and investment returns (including the discount rate). [Note that the company would need to set up deferred tax liabilities for I-E tax on unrealised gains - this is similar to the ideas covered in Chapter 8.]

A more sophisticated model would, as you say, project minimum profit as well as I-E and test whether the company is XSI or XSE at each projection point and then adjust the taxation calculations accordingly.

The considerations will be similar to those described in Chapter 24 for allowing for taxation when pricing products under different taxation situations.

 

Yes - technical provisions don't have to include allowance for tax on shareholder profit, so there would be no allowance for tax within the technical provisions for non-BLAGAB products.

Yes, the main "investment return" item would be the EIOPA risk-free rate. I mentioned this as "including" the discount rate rather than only being the discount rate, because bear in mind that the risk-free rates are also used as the expected return on unit funds when projecting them forwards in order to determine cashflows for non-unit reserves, and also for projecting forward asset shares in order to determine future with-profits benefits. Also, if the company is using a stochastic model (eg to value guarantees), then bear in mind that the simulated investment returns within the economic scenarios would also have to be netted down where appropriate - and these would not be just the risk-free rate. Does that make sense?

 

Re stochastic modelling: the economic scenarios would first be simulated on a gross (pre-tax) basis. The economic scenario generators will be calibrated in order to produce a risk-free return on average across all simulations, with the variability of returns around that expectation varying according to the underlying asset and the assumed corresponding volatility (or distribution) of returns for each asset type. To the extent that these scenarios are used to project or model BLAGAB products, whatever investment return has been simulated in that particular scenario would be netted down.

 

The Solvency II balance sheet should be assessed on a "going concern" basis: the company can be assumed to remain open to new business (assuming that it is not already closed) when setting assumptions such as expenses and tax (although of course liabilities do not have to be held for future new business). As for unit pricing, the deferred tax liability will be based on high level assumptions rather than detailed cashflow modelling.

 

Yes re XSI and expected to remain so.

For companies that are currently XSE, there are different ways that this could be done. The more complex approach would be that the company could program the cashflow projection model to determine whether it is XSI or XSE in each future year and the model could then adjust the taxation approach accordingly for each period (eg as you say gross/gross for XSE years and net/net for XSI years).

Alternatively, if the company expects to return to an XSI position at some point, it could still just net down all of the I and E in its calculations in every projection year. This is because the "excess E" arising will get carried forward and, at some point, used to offset the I arising - so it is OK just to net it all down in the calculations. [There may be a small adjustment made to allow for that fact that in practice the tax relief on the excess E won't happen in the same year that the E arises, there will be a slight deferral.]