UK: Insurance Monitor

Last Updated: 7 April 2000

Current insurance accounting and regulatory issues


  • The Chancellor's budget
  • FRS 15: Tangible fixed assets
  • FRS 16: Current taxation
  • FRED 19: Deferred taxation
  • Insurance groups directive
  • Mortgage endowments
  • Pensions review - phase 2
  • CP 41 - Insurance draft Interim Prudential Sourcebook
  • Equitable Life case

The Chancellor's Budget - 10 Changes affecting the wider insurance industry

All companies

  • The paper setting out the results into the review of double taxation relief makes it clear that the extent of credit relief available in respect of overseas income referable to insurance business including general insurance and those categories of life assurance business taxed under Case VI, will be restricted by requiring the deduction of claims and increases in policy liabilities. The existing regime restricting credit relief for OLAB will be extended to LRB and Case I computations. However, the existing general restriction in section 802 ICTA 1988 on credit relief for UK insurance companies trading overseas is to be repealed. Any overseas tax which cannot be credited under this regime will be available for relief as an expense notwithstanding section 795 ICTA 1988. Insurance companies will not however be able to carry forward or to carry back excess foreign tax credits.
  • The accruals basis election enabling life companies to be taxed in respect of loan relationships on an accruals basis whilst accounting on a mark-to-market basis will not be renewed for accounting periods ending after 31 March 2000. With the original rationale for the election, the lack of a SORP, now gone the Inland Revenue have decided that the need to observe across the board the general proposition that the tax results should follow the accounting methods outweighs any other consideration.

Therefore, unless an accruals basis of accounting is adopted for assets where the election has been made, the accumulated difference between the methods applied to such assets will fall into tax at the beginning of the first period ending after 31 March 2000. In most cases this will now have occurred on 1 January 2000 and should have been taken into account in the deferred tax calculations at 31 December 1999.

- Insurance companies will need to keep under review the arrangements for captive insurers and offshore life assurance and service operations in the light of the proposed changes to CFCs.

- Insurance companies will not be able to take advantage of corporate venturing relief.

- Insurance companies may wish to use the facility to agree 31 March 1982 values of properties with the Inland Revenue in advance of sale.

General insurance

  • General insurance companies will be subject to a charge to interest where provisions for unpaid claims (including IBNR) prove with hindsight to have been excessive. Interestingly, the Inland Revenue are not departing from the general rule that scientifically calculated provisions shown in the accounts should be deductible. Nevertheless, to avoid the interest charge companies will be able to disallow part of the provision for tax purposes. These measures will be set out in detail in regulations subject to consultation with the industry. They will apply from 1 January 2001 and it will be deemed that the whole of the provision for unpaid claims was made in the immediately preceding accounting period. These provisions will also apply to captive insurance companies in tax havens but they will not apply to long term business or to mutuals.

Life insurance

  • The proposed changes to the rules for group relief will be modified in the case of branches of overseas life assurance companies. A simple rule will be adopted whereby any Case I loss will be reduced first by the amount of any OLAB loss before looking to losses of other Case VI businesses and, finally, management expenses
  • The changes to the rules for grouping of companies for the purposes of tax on chargeable gains do not extend to the repeal of the ring-fencing provisions in section 440 of the Income and Corporation Taxes Act ("ICTA") 1988 but the possibility of a life assurance company making an election for an asset which has been disposed of outside the group to be treated as if it had been transferred to be a category (e) asset of the company has not been explicitly ruled out. Consequential changes will however be made to reflect the revisions to section 139 of the Taxation of Chargeable Gains Act ("TCGA") 1992 which is currently modified by section 211 of that Act.
  • The changes to the tax treatment of "ratchet loans" (loans with interest rates linked to profits) will be relevant to subordinated loans used to securitise future profits of long term business where the interest and/or repayment terms are dependent upon the emergence of surplus.
  • Section 431D ICTA 1988 will be largely repealed as primary legislation and replaced with regulations giving greater flexibility to the Inland Revenue to agree appropriate definitions of OLAB with the industry and to respond more quickly to international developments. The Inland Revenue will also examine the attribution of assets in paragraph 5(5) of Schedule 19AA ICTA 1988 to reflect the introduction of the Euro, FOTRA status for all gilts and the treatment of hybrid linked assets.
  • Changes will be made to the apportionment of items between the various categories of life assurance business. The principal change will be to clarify the way in which interest payable is to be allocated. Where interest is paid on a loan supporting the long term business as a whole, allocation in a manner similar to interest income will still be deemed appropriate by the Inland Revenue.
  • The rate of corporation tax applying to the policyholders' share of chargeable gains will fall to 22% on 1 April 2000.
  • The proposed rollover relief on substantial shareholdings in trading companies will only apply to life assurance companies in respect of their structural subsidiaries.
  • The appropriation of shares for the new employee share schemes by a life assurance company is to be treated as an expense of management.
  • There will be special provisions for life assurance companies in connection with the changes to ensure that the disposal of a stream of rentals is treated as Schedule A income.
  • Life assurance policies held in connection with all personal pension contracts, including stakeholder pensions, will be excluded from the chargeable events regime.
  • Life assurance companies giving shares by way of donations to charity will only get relief for the amount apportioned to BLAGAB, and then as an expense of management.

Financial Reporting Standard 15: Tangible fixed assets

FRS 15 supersedes SSAP 12 and is applicable to accounts for periods ending on or after 23 March 2000, with earlier adoption encouraged.

The standard does not apply to investment properties but does apply to an insurance company's other tangible fixed assets.

Included in its provisions is a requirement that where fixed assets are not depreciated on the grounds that the charge would not be material, an impairment review is carried out annually. This will apply to an insurance company's self-occupied properties which are not depreciated for this reason. An annual impairment review is also required if the remaining useful economic life is more than 50 years and again this would apply to an insurance company's self-occupied properties.

Financial Reporting Standard 16: Current taxation

FRS 16 was published in December 1999. It supersedes SSAP 8 and UITF 16, which are now withdrawn, and is applicable to accounting periods ending on or after 23 March 2000 with earlier adoption encouraged. We expect that most companies with December year ends will wish to apply the new standard in their 1999 financial statements.

The requirements of FRS 16 are little changed from the exposure draft , FRED 18.

Publication of the standard was anticipated in the December edition of Insurance Reporting Update and comment on the implications for insurers may be found there.

Financial Reporting Exposure Draft 19: Deferred taxation

Comment on FRED 19 is also included in the December edition of Insurance Reporting Update.

A standard will not be issued until later in 2000 and it will not be applicable to 1999 year ends.

Insurance groups directive

The directive was published in the Official Journal on 5 December.

The next stage is adoption by member states and this is due to be completed by 5 June 2000. It will then be effective for financial years commencing on or after 1 January 2001.

A consultation paper is due to be published shortly.

Mortgage endowments

The FSA announced in December 1999 that it had concluded that holders of mortgage endowments have enjoyed returns such that they have fared at least as well as they would have done with a repayment mortgage and that there were no grounds for an industry-wide review of all past business.

However it was also found that radical improvements in communications with policyholders are necessary and the ABI has committed its members to a package of measures to be implemented by Spring 2000. In the meantime all policyholders will receive from their insurers a copy of an FSA factsheet.

Pensions review - phase 2

The FSA and PIA (see FSA Bulletin 7) are aware that an aspect of the PIA guidance on loss calculations for two categories of transfers may result in the material mis-statement of loss for a significant number of phase 2 cases. There is also a potential impact for some opt-out/non joiner cases where individuals have changed employment and a transfer-style approach has been adopted for the treatment of a SERPs adjustment; the number of cases in this category is expected to be considerably smaller.

This issue will result in a change to the PIA guidance for phase 2 loss and redress calculations, details in respect of which are set out in FSA bulletin 8. The regulators' best estimate of the potential impact on the overall phase 2 redress bill remains in the range 5-8% of the total phase 2 liabilities. The industry suggests that this broadly equates to a 15% increase in average phase 2 transfer liabilities.

The regulators are now carrying out a major piece consumer research to size the extent of the problem. This will take some months to complete, and consequently it will be some time before the detailed guidance and "missing factors" (see bulletin 8) are confirmed.

Despite this temporary hold on certain aspects of the phase 2 review, there are no changes to the published deadlines. In particular the FSA phase 2 deadline (30 June 2002) for completion of case reviews remains unchanged.

CP 41 - Insurance draft Interim Prudential Sourcebook

The FSA has recently published the above consultation paper which sets out the background to its Interim Prudential Sourcebooks for friendly societies and insurance companies, of which drafts are also now published.

The Interim Prudential Sourcebooks (IPSB) will apply from N2 - the date, likely to be in the second half of this year, when the rules under the Financial Services and Markets Act (as it will then be) come into force;

The FSA's overall plans for the Prudential Sourcebook were set out in CP 31 (The FSA's approach to setting prudential standards). Although the layout of the draft IPSB is radically changed from that in existing sources, the substance is intended to be largely unchanged. However a few important new features planned are set out in CP 41:

  • the requirements of the Insurance Groups Directive;
  • requirements for enhanced disclosures in relation to long term with-profits business;

(separate consultation is to take place for each of the above)

  • reduction in lodgement period for regulatory returns, already announced in CP 31:



Electronic submission

4 months

3 months

Hard copy

3.5 months

2.5 months

  • valuation of assets:

- admissibility percentages to be based on total admissible assets, less reinsurance recoveries;

- bank deposit admissibility limit to be higher of Ł2m or percentage based limit, subject to FSA being pre-notified of bank to be used;

- new admissibility limit for listed equities based on proportion of investee company's market capitalisation to FTSE All Share total.

(these are intended to reduce the number of concessions currently made under section 68)

  • the use of forms M1 to M4 by marine mutual insurers (currently allowed by individual concession) is to be permitted.

None of these changes have been incorporated in the January 2000 draft of the IPSB, these will be incorporated in a later draft.

The closing date for comment on CP 41 is 31 March. The full text of CP 41 and the current draft of the IPSB may be seen in the publications section of the FSA website (

Equitable Life case

We reported on this case in the December 1999 issue of Insurance Reporting Update. The court decision outlined there has now been overturned by the Court of Appeal. Leave to appeal to the House of Lords was granted.

If you would like further information on any of the matters discussed in this Insurance Monitor please talk to you usual contact at KPMG or Hitesh Patel, Director of Insurance Technical and Regulatory Services, in our London office on 0171 311 5460, e/mail

The above is intended to provide only a brief summary of current insurance accounting and regulatory issues. Whilst we take care to ensure that the information given is correct, details may be omitted which may be directly relevant to a particular entity. The information should therefore not be taken to be sufficient for making decisions.

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