Hi Colin, This question is on taxation of GI companies and inline with the October 2009 Q2 part vi. My question is as following: 1. A proprietary general insurance company will be taxed on worldwide trading profit and pays corporation tax on the same. Where worldwide profit is Income + gains less expenses. Right? We basically call it a traders in securities. My question is where and how do we allow for underwriting profit i.e. actual experience being better than expected and hence co. making profit? 2. For a life insurance co., where do we allow for underwriting profit, in BLAGAB or NON BLAGAB? 3. How is a mutual Insurance company taxed? Will it be different for Life insurance mutual co. and GI Mutual Co? Thanks in advance for your help. Kind Regards ishita
I may struggle with this one. There may be a GI expert out there. My feeling is that underwriting profits are basically the difference between the premiums collected (revenue) and the expenses and claims paid as well as any "technical provisions" for claims that are yet to be paid out. As such underwriting profits will be taxed automatically in a proprietary company. The same applies to a life company. As far as mutuals are concerned, the only information we have is the answer to the question you refer to above (which does not give enough to really make head nor tail of unless you work in GI I suppose).
Propriety general insurers are taxed on their trading profit for the year which is the underwriting result + any investment/capital gains less unrelieved losses from previous years. The underwriting result is equal to the insurance profit for the year, which is equal to net earned premiums less net earned claims (reserves at end of year less reserves at beginning of year) less expenses. The earnings result there is important, just because you write a policy with $10m premium doesn't mean that you can book the entire profit from the policy in year 1, if the policy is multi year then you earn the profit over time. The concept of earnings is important, because if you have a long contract, e.g. a 10 year engineering project then most of the risk will emerge at the tail end (when the building is close to being completed) so the largest part of the profit/loss should be booked in that year. Mutual insurers are only taxed on their investment returns, the underwriting result has no impact on the taxable amount. I don't know about Life Insurers but would have thought it would be similar in terms of earned premiums less net earned claims.
Thanks Colin and Shillington, I need to sit down and think it through. Another quick thing, why are GI companies called trader in securities?
Whew. I thought there might be an expert out there. Thanks for that. I think "trader in securities" relates to certain companies that actively trade securities (rather than buy and hold them). The taxation treatment differs for these companies because accruing gains and losses to the maturity of a bond for example, would make no sense. So gains and losses are taxable as they occur.
