Why is the "I-E" regime inhibiting new entrants into the protection market?

It is said that one of the reason that "I-E" tax regime is removed from protection business is that it may inhibit new entrants into the market.

Can anyone please explain why “I-E" has this impact?

Many thanks!

 

Lets give it a go!

Note - To rephrase your question: I would think its protection business being removed from "I-E" tax regime instead of the converse.

It stems from differences in companies overall tax positions - which is itself dependent on the volumes/mix of long-term insurance business written and factors such as size, how its been trading, territory etc.

Protection products generally have little profit margins and hence require keen competitive effort to drive market share. The result is that those companies in "tax advantaged" positions could price out or fend-off competition. Who has tax advantage in this case?

In (re-)pricing a product, a company would usually consider its overall tax position (XSE or XSI) to impute an expected future tax liability in the premium.

Consider a company (A) that has only ever written protection business ( term assurance and its equivalents); Expenses are typically a greater proportion of its cashflows compared to investment returns (income & CG), so it is reasonable to assume that such a company would usually be in XSE position - meaning it would in most cases not be getting relief for expense incurred but carried forward, which suffices to say that it would be paying a higher "effective" tax (relative to company below).

Consider another company (B) that has lots of savings and investment business lines; It would generally be in XSI position (because of larger reserves amongst other things) and can assume enough "I" to absorb "E" (at overall company level) hence a lower "effective" tax rate.

If both company A and B are presented with an opportunity to launch a new protection product (or reprice an existing one), "A" would have to impute a higher effective tax rate relative to B. Meaning B's premiums would be lower (potentially significantly!) which would almost draw new, and possibly existing, business from A. This problem is likely to be acute for start-ups because of the high initial costs.

Sorry its long and probably winding, but hopefully it helps.

Good luck!

 

I-E regime will distort the starting position for protection business

Hi dok,

Thanks a lot for your detailed explanation and example. It's very helpful.

So my understanding to this is now that: as companies have different overall tax positions (potentially some XSE and some XSI), when they want to write protection business (as protection business tends to produce XSE), the XSI companies will have a tax advantage to the XSE companies and so can charge a lower price. This creates unfairness at the starting position.

Many thanks for your help!