UK: Insurance Market Update: The Deloitte View For Non-Life Insurers

Last Updated: 6 April 2009
Article by Deloitte Financial Services Group

Most Read Contributor in UK, August 2017

Welcome to this March 2009 edition of the Insurance Market Update in which we focus upon issues in the general insurance industry. This month, we feature articles on third party payments and a briefing on the proposed tax rules on general insurance technical provisions.

Our articles cover the following:

  • Third Party Payments – the risk to insurers, agents and intermediaries from making inappropriate third party payments is always present but there are also implications for those individuals charged with governance. With increasing scrutiny from the FSA, Rachel Sexton and Mark McIlquham consider third party payments within the insurance industry and present an overview of some of the issues which companies now face in current market conditions. A number of factors to consider are suggested in an attempt to minimise financial loss and loss of reputation; and
  • Insurance Tax Briefing – in which Simon Claydon and David Clissitt consider the proposed new tax rules on general insurance technical provisions. This topic will be of interest to companies writing general insurance in the UK, Lloyd's managing agents and members, and captive insurance companies, their UK parents and local captive managers.

We hope you find this edition informative and, as always, your comments and suggestions for future themes or topics are welcome.

Kevin Elliott


Firms, syndicates, managing agents and intermediaries need to consider compliance with laws and regulations administered by the US and the UK when transacting insurance business across borders. This could, potentially, involve sanctioned countries and individuals as well as countries rated lowly on the Transparency International Corruption Perceptions Index. There has been significant regulator and prosecutor activity in recent months which reinforces the need to comply with any legal or regulatory sanctions or principles of business.

The insurance industry is categorised by the payment of funds across borders. These may be claims related payments to policy holders, repairers or loss adjusters, but could also be sub-broker or commission sharing fees to co-brokers or other introducers of business. Whenever a relationship is entered into, or a payment made, firms and individuals charged with governance need to be aware of the plethora of regulatory and legal challenges.

Earlier this year, the Financial Services Authority (FSA) fined a broker Ł5.25 million for failing to take reasonable care to establish and maintain effective systems and controls in respect of payments to third parties in the insurance distribution chain. Shortly afterwards a bank reached a settlement of $350 million with the US authorities for sanctions violations.

The US has passed a number of pieces of legislation which have had extra-territorial application, examples of which include the Sarbanes-Oxley Act and the Foreign Corrupt Practices Act (FCPA). Recently, a department of the US Treasury, the Office of Foreign Assets Control (OFAC), which is responsible for imposing economic and trade sanctions based on the aims of US foreign policy, has become active in scrutinizing the activities of non US based firms.

OFAC sanctions can fall under prohibited transactions with certain countries (country based) or prohibited transactions with named individuals or companies (list based). The sanctions apply to European insurers and intermediaries when they engage in transactions with US institutions or when they set up branches, offices or other businesses in the US which may be regarded as being a US person. In addition, jurisdiction may be extended to cover all transactions denominated in US dollars, as all US dollar transactions must be "cleared" through the US banking system.

Now that the banking industry has tightened its compliance with OFAC sanctions, OFAC has turned its attention to the insurance industry and recently hired an insurance specialist.

Insurance and reinsurance transactions which could breach OFAC sanctions are not easily identified. The business being written must be understood and any sanctioned individuals or countries must be identified at the time the policy is issued. OFAC can impose both civil and criminal penalties for violations of its sanctions.

Within the UK, sanctions are governed by HM Treasury; it is responsible for implementing and administering sanctions and for licensing exemptions. The FSA also has a broad mandate. In respect of corruption, the Anti Terrorism Crime and Security Act 2001 puts it beyond doubt that bribery is a criminal offence in the UK. The Proceeds of Crime Act makes it clear that all criminal conduct that creates a financial benefit constitutes money laundering. It also clarifies that this relates to criminal conduct anywhere in the world if that conduct would constitute a criminal offence if committed in the UK including corruption and tax evasion. It is therefore possible that any investigation into a firm in the UK will be required to review payments from early 2002 onwards (which is not a palatable option for most businesses).

The FSA is now carrying out thematic reviews across the wholesale insurance market, and we expect further regulatory intervention as a result of these visits. It is also likely that the SFO will take criminal action against individuals proved to be involved in corrupt practices with potential penalties of up to 7 years in prison. Of course, firms with robust controls and good quality files which justify the economic rationale for the commission payment or entertainment spend will have nothing to fear.

Conventional compliance approaches can be difficult for insurers, syndicates, agents and intermediaries. In designing a compliance strategy for corruption, bribery and sanctions it is important to adopt a risk-based approach. This involves determining those parts of the business most at risk, writing the policies, configuring the necessary technology and managing the process and the reporting requirements. Experienced and specialised teams are often required to achieve successful implementation.

Within a recent survey conducted by Deloitte, companies mentioned several areas of difficulty in complying with sanctions:

  • Uncertain interpretation of sanction rules – for example, when should a transaction be blocked or rejected?
  • Difficulties in filtering transactions – including which filtering software to use, which transaction to filter and what degree of "fuzzy" matching to employ and after the transactions are highlighted by the filter, how they will be reviewed by staff?
  • Numbers of sanctions lists – the lists are not easily accessible and are very long and detailed. For some companies, the challenge is to know which list should be used for which type of transactions. A number of companies also mentioned difficulty in amalgamating the lists and ensuring that they remain up-to-date.
  • Determining the cost versus benefit – the more transactions which must be scrutinised by staff, the more the compliance costs. A balance must be struck between the costs and the benefits of compliance.

Before designing and implementing a compliance program, insurers and brokers should consider the following questions:

  • Which part of the business should be screened from a sanctions perspective (premiums, claims or both)?
  • How should a risk based counterparty "take on process" work in this industry, and is there a corruption proof payments control programme which avoids all but the most risky payments being escalated within the organisation?
  • What is the procedure for handling existing clients that maintain business relations with sanctioned countries?
  • How should an effective "white list", or a list of accepted customers, be constructed?
  • How should conflicts which may arise between reporting transactions to OFAC and the local regulations on data privacy be dealt with?
  • What information does the board and those charged with governance really need to discharge its obligations in this area?
  • How should paper based transactions and manual payments be screened?
  • What is a reasonable review process?


Some companies, jurisdictions, classes of business and transactions carry a higher risk than others. These will have to be considered and effective policies designed to address these higher risks. The risks of OFAC, FCPA and FSA non-compliance can be reduced through clear definition of the regulations and effective process implementation. An effective compliance strategy must include both technology and a robust process to analyse and manage the information captured by technology.

It is challenging for insurers, syndicates, agents and intermediaries with complex operations to understand all of the regulations with which it must comply. Once the regulations are understood, then the firm's policies, procedures and processes must be designed in a way to ensure compliance. When instances of non-compliance do occur, there should be robust processes in place to highlight these instances to allow senior management to respond quickly. As recent cases illustrate, it pays to be well-informed and prepared when the regulator comes asking questions about the business.


The UK Government is proposing specific rules to limit the tax deduction for general insurance technical provisions. The rules are currently subject to a brief period of consultation before they are enacted.

The proposals will affect companies writing general insurance business in the UK and UK branches of non-UK general insurance companies, Lloyd's syndicates and their members, controlled foreign companies and UK companies that have an interest in them. Although the Government's stated aim is not to target the vast majority of general insurers, the proposed new rules will apply to, and have an impact on, all of them.

Under the proposed rules, the technical provisions in the accounts should be acceptable for tax, provided they are an "appropriate amount" based on an actuarial opinion that those provisions are not excessive.

If the general insurer does not satisfy this and other conditions, an HMRC enquiry may lead to the tax deduction being limited to the undiscounted best estimate of claims, which may be significantly different from the provisions booked in the accounts. Any disallowance that arises in this way will effectively reverse in the following period, subject to the position at the end of that period.

The proposed rules are expected to be effective for periods ending on or after 31 December 2009.

Definition Of "The Appropriate Amount"

There are three conditions which all need to be met for the "appropriate amount" to be the figure in the accounts:

  1. (i) the general insurer must give written confirmation with the tax return that the claims provisions is not excessive, and (ii) that confirmation must be based on the written opinion of an actuary or other suitably skilled person, which is
  2. given at the time that the provisions are adopted by the general insurer (usually when the accounts are signed), and
  3. is made in accordance with standards set by the Board for Actuarial Standards (or an equivalent standard for non-UK general insurers).

If any of these conditions are not met the appropriate amount is the undiscounted best estimate.

The "suitably skilled person" in condition a) (ii) is not further defined, but it will need to be someone able to interpret and follow actuarial guidance. The opinion must therefore be an actuarial one even if the person giving it need not be an actuary. The original intention of the legislation was thought to be to set a reasonable limit for tax, based on actuarial guidance, which, if shown through a tax enquiry to have been exceeded, would cause the tax deduction to be restricted to that limit.

The rules as currently proposed are quite different. If the provision in the accounts is even 1% above an actuarially recommended range, or if the conditions outlined above are not met, the general insurer risks being denied a tax deduction for the excess over an undiscounted best estimate of those provisions. There is no room for a deduction for any figure between the amount claimed in the accounts and the undiscounted best estimate.

In addition to the normal information powers in relation to tax enquiries, HMRC will have the power to require a general insurer to obtain an independent report as to whether the provisions in the accounts exceed the appropriate amount, and if so by how much. Although we understand that such a report would not be routinely required in tax enquiries, the costs associated with fulfilling such a requirement may be significant. This underlines the need for all general insurers to have a robust filing position in relation to their technical provisions.


The rules will be applied at syndicate level at Lloyd's, where there is already actuarial sign-off as to the adequacy of the technical provisions (or reinsurance to close amounts for closed syndicates). Lloyd's may therefore see the development of actuarial opinions that comment both on adequacy and on whether they exceed the "appropriate amount".

We understand that regulations to deal with changes in member participation have been developed, but not released for public comment. Regulations to deal with the trickier issue of how to take account of member-level reinsurance have not yet been drafted and may only be drafted when the need arises in practice.

The rules will first apply to syndicate returns of profits or losses declared in 2010, that is to the 2007 year of account returns and run-off of earlier years of account.

Captive Insurers

The issues set out above apply also to captive insurers, but the primary legislation in Finance Act 2007 ensures that the rules will be enforced by HMRC in relation to the UK parent's tax return. The significant issue for captives, in common with other general insurers, will be assurance that the accounts provisions are robust enough to justify a tax deduction under the UK tax rules for anything above undiscounted best estimate.

Year-End Issues

There are some year-end challenges given the timing associated with the various conditions, and the potentially significant difference between the accounts provisions and the undiscounted best estimate.

General insurers will need to consider whether the opinion on which the accounts figure is based, if there is one, was prepared in accordance with actuarial standards. This will include whether the conclusions reached from having applied those standards are within the bounds of what is reasonable.

It will only be possible to assess the potential impact of an HMRC challenge if the general insurer knows what its undiscounted best estimate is at the time the accounts are signed.

Additionally, at the time the accounts are signed, the general insurer will not have given the required written confirmation that the provisions are not excessive in order to be able to rely on those provisions for tax. It will only do this when it files its tax return.


All general insurers should consider whether their technical provisions as currently calculated would comply with the new rules and, if not, what they would need to do to comply. The extent of the action required and the compliance challenge that general insurers will face will differ from organisation to organisation.

In order to eliminate, as far as possible, the risk of being denied a tax deduction for that part of the provisions that exceed an undiscounted best estimate, insurers and insurance managers:

  • will need assurance that their processes do arrive at, and adequately document, technical provisions that will meet all of the requirements under the new tax rules; and
  • must ensure that the provision booked in the accounts does not exceed the top of any range of reserves recommended through actuarial review.

Some general insurers may choose to use internal actuarial and tax resource to review their processes and provide that assurance. Others may need or want some external assistance, ranging from peer review of their processes to complete outsourcing of the preparation of the actuarial opinion.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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