Protection experts are concerned that removing tax relief on reinsured business could see insurance premiums jump by 3 to 4 per cent.
The proposals outlined in the pre-Budget report aim to close a tax loophole for insurers but could have serious implications for consumers.
Insurers currently receive tax relief on expenses they incur in respect of reinsured business while reinsurers get tax relief on the reserves they hold to pay future claims. This has seen insurers assuming all the expenses while passing the liability for reserves on to the reinsurance company but the legislation aims to prevent this.
Redmayne Consulting managing director Nigel Bradshaw says the wording of the legislation is causing confusion.
He says, in the past, some insurance companies avoided tax by disguising reinsurers’ expenses as a loan or a rebate of premium or by paying a net premium to avoid the reinsurer having to make a payment on account of expenses back to the insurer.
But he says this practice is now rare so if the legislation is taken at face value, it will have little impact on the industry but the wording can be interpreted to extend beyond that.
Bradshaw says: “It is going to catch far more than planned. In short, it will increase premiums by 3 to 4 per cent. The top insurance companies, particularly in life business, are using reinsurers quite heavily. If they carry on doing this, they will almost definitely have to put up prices.”