Mr. Deputy Speaker
With this amendment we may take the following amendments:
No. 40, in page 21, line 34, leave out subsection (7).
No. 39, in page 21, line 34, at beginning insert:'Subject to subsection (7A) below'.No. 41, in page 21, line 40, at end insert:'(7A) Sums recorded in a company's accounts as paid or due to:
shall not be deductible by virtue of subsection (7) above'.
- (a) any subsidiary of that company;
- (b) any company of which that company is a subsidiary; or
- (c) any other subsidiary of any company of which that company is a subsidiary;
§ Mr. Moate
The principle raised here is important. The purpose is primarily in order to obtain clarification of the proposals.
Subsection (7) states that the levy is to be calculated from a company's net premium after reinsurance premiums have been deducted. No doubt the Minister can explain this, but at the moment I fail to understand why the levy is not to be applied to the gross premium income of insurance companies.
My general understanding of the Bill is that, should a company fail, there will be a levy applied to certain groups of policyholders to a maximum of 1 per cent. on their policies. That is a simple enough concept. It is what I term a "front end" tax. It applies to the premiums paid. A motorist with a £100 premium could pay a £1 levy on his premium in a year. However, this subsection says that the principle is to be applied not to the gross premium but to the net premium after reinsurance, and this conflicts with my understanding of the Bill.
If a company reinsured 90 per cent. of its business away, it would be left 1893 with only a 10 per cent. net income and the levy would be applied on that, so that the policyholder of that company would pay only one4enth on his gross income. But if the same insurance company collapse caught another motorist, who was paying £100 but his company reinsured not at all, the policyholder would pay the full £1. It is hardly a fair system between the one policyholder and the other.
It should not matter what reinsurance arrangements are entered into by a company. I fail to see why reinsurance premiums have been taken into account in assessing the leviable premium income of insurance companies. I hope that the Minister can advise me on this point.
§ Mr. Roper
The Minister will recall that in Committee I tabled an amendment in identical terms to that just moved by the hon. Member for Faversham (Mr. Moate) and, after recognising that there were complications in this issue, the Minister agreed to consider the matter. Therefore, I was disappointed to see no amendment from the Government to deal with the problem. I understand that, after full consideration, the Government have decided that it is best to leave the clause as it stands.
This is not a very happy solution. The logical answer would be not to allow the deduction of any reinsurance premiums and to base the levy on the premiums on those general policies entitled to the protection of the guarantee scheme—that is, policies taken out by individuals and not corporate bodies. However, this is thought to be impracticable because insurance companies cannot easily separate the premiums on protected general policies from those on non-protected general policies.
As it stands, therefore, Clause 19 places the general business levy on the premiums on all United Kingdom general policies. That being so, it would be unreasonable not to permit the deduction of reinsurance premiums, since most are paid in respect of the larger policies which are outside the scope of the Bill. Not to permit the deduction of these reinsurance premiums would also bear harshly on smaller companies which pay away a larger proportion of their premiums by way of reinsurance premiums.
1894 But it produces an anomaly, and that is when reinsurance premiums are paid to a connected company within a group. This is a wide open loophole, because an insurance company has only to establish a subsidiary insurance company and then reinsure all its business with the parent company to escape entirely the levy on the subsidiary's business. There are a number of large insurance groups which for valid commercial reasons operate through a number of subsidiaries and reinsure much of their business of subsidiaries in the group. There is no reason why they should not do this. But it is quite wrong that they should in consequence pay a materially lower levy in relation to the premium income than other insurance companies which operate on a unitary basis.
Surely it is right that a group should be treated for the purposes of the levy as if it were a single company, and reinsurance premiums within the group should not be deductible. I understand that the Government considered an amendment in these terms, but rejected it on the grounds that retrocessions are not deductible and hence a reinsurance within the group which is then retroceded outside the group would not be deductible when, in fairness, it might be argued that it should be. They also believed that it would be wrong to make reinsurances within the group not deductible when reinsurances between two unconnected companies, possibly on a reciprocal basis, would remain deductible. I do not And either of these arguments convincing.
There appears to be no reason why a company wishing to reinsure outside the group should first reinsure within the group and then retrocede outside the group. However, if it chooses to arrange things in this way, it must accept the consequences.
On the other hand, arrangements between unconnected companies involve expense and it therefore seems unlikely that companies would choose to incur expense in order to reduce their liability to levy if a levy is imposed. The overriding consideration must be that an insurance organisation which is really a single body, but which for its own purposes chooses to operate through a group of subsidiaries, should not thereby pay 1895 an appreciably lower levy than it would if it operated on a unitary basis. If the organisation is really a single organisation, it should be treated as such, and the amendment which stands in my name and the names of my hon. Friends seeks to do just that.
§ Mr. Deakins
I should like to deal first with the amendment moved by the hon. Member for Faversham (Mr. Moate). We debated this matter in Committee on an amendment moved by my hon. Friend the Member for Farnworth (Mr. Roper). I do not consider that the hon. Member for Faversham has put forward any more points than those he raised in Committee.
Basically, there is a difference between the treatment of general and long-term business in respect of the definition of net premium income liable to levy. I remind the hon. Gentleman that our original proposals, supported by the industry, was that the levy should in all cases be applied to premium income net of reinsurance. Later, the life offices changed their minds and asked that in the case of long-term business the levy should be applied to premium income before deduction of reinsurance. It was argued that this would be more convenient for the life offices, and would prevent certain offices, which habitually reinsured all their long-term business, escaping the levy although their policy-holders would qualify for protection.
In another place the Government proposed an amendment changing the treatment of premium income in respect of long-term business. The position over general business is rather different. Here, reinsurance of a certain proportion of the risks is standard practice. Many small companies retain quite a small proportion of the premium which they receive, and pay the rest to a reinsurer. These companies would be particularly hard hit by the application of the general business levy to their gross premium income. It is not realistic to imagine that general business companies will in future indulge in widespread reinsurance simply to evade the levy. The industry is responsible. Moreover, as reinsurance costs money, individual insurers will not wish to increase their costs and therefore their premium levels beyond the level of their competitors.
1896 The British Insurance Association is opposed to this amendment. Therefore, on balance, I believe that the hon. Gentleman should consider withdrawing it.
§ Mr. Moate
What the BIA thinks about it is a matter of complete indifference to me. On this point I speak for myself and not for any insurance interest whatsoever. If companies are to be levied on their net general business income after reinsurance, will it mean that, as the levy is to be passed on to all policy-holders, one policyholder will be treated differently from another in respect of the same insurance company collapse?
§ Mr. Deakins
The policyholders will pay the levy according to whether it is general or long-term business. In the case of a company which has both types of business, there can be a levy on one class of business, but not on another. One would not be levying it on all the policyholders of that company in respect of both types of business. Have I made the point clear to the hon. Gentleman?
§ Mr. Moate
I do not think that I could have made the point clear to the Minister. Taking the same class of insurance—a motorist with one company and another motorist with another, but with different rates of reinsurance—is the hon. Gentleman saying that those policy-holders would be paying a different rate of levy?
§ Mr. Deakins
I am advised that they would not be paying a different rate of levy.
My hon. Friend the Member for Farnworth (Mr. Roper) moved an amendment in Committee to alter the basis of the general business levy. Indeed, he made out a strong case for some change of the kind that he is now proposing. I thought then that it was a good case and undertook to re-examine the matter before Report. I have re-examined the matter in consultation with the insurance industry. In the course of that careful re-examination we looked seriously at a formula remarkably similar to the one now proposed by my hon. Friend, but reluctantly came to the conclusion that it would not be practicable or worth while to proceed in that way.
The present formula for the general business levy rests on figures which are 1897 already available to companies. The formula proposed in the amendment would involve companies producing figures which are not now available and do not need to be identified for any other purpose. I am informed that the amendment, if accepted, would also penalise the arrangement which obtains in some major insurance groups whereby companies in a particular group pool their business for reinsurance purposes before sharing it out in predetermined proportions among their members.
The practice of companies and groups over reinsurance differs widely in detail. Therefore, it is an almost impossible task to devise a formula for the levy which not only meets my hon. Friend's objectives but fits in with the various arrangements in force in the insurance industry.
I accept that if greater advantage were to be gained from the change it would be worth while requiring the companies to alter their practice to accommodate it. However, I am not convinced that is so. Neither we nor the industry foresee any widespread attempts to evade the levy in the ways feared by my hon. Friend. If my hon. Friend's proposal were accepted, it would not entirely eliminate the opportunities available to the determined evader of the levy. On the present formula the levy will be sufficient to cover likely needs. The change proposed will not improve the protection afforded to policyholders under the Bill.
§ Mr. Roper
I realise that the effect will not be very significant in respect of policyholders, but it will introduce a greater degree of justice between different companies within the industry.
My hon. Friend said that the industry resisted an amendment on these lines. Of course, a trade association, speaking for a whole industry, is always reluctant to accept an amendment which will lead to increased payments for its members. This amendment would inevitably lead to increased payments for companies which operate the group system, as against those which operate on a unitary basis. Does my hon. Friend agree that, despite this resistance by the industry, the amendment, if accepted, would ensure a greater degree of fairness between companies within the industry and that, therefore, he should consider it carefully?
§ Mr. Deakins
I think that my hon. Friend may have a good point, but given the nature of the Bill, we cannot achieve perfect justice. Perhaps there will have to be a certain amount of rough justice. We have already discovered in Committee, and perhaps even today, that there are certain anomalies. It is in the nature of a Bill of this sort that started its rather chequered career in another place that that should be so. The Bill was fundamentally altered in certain important respects in another place and it has since been altered here in Committee and on Report.
The Bill may not meet the requirements of my hon. Friend and others in the industry who feel that one section has been rather more unfairly treated than another. However, we have honestly done our best to satisfy the needs of the industry. We have had to take full account of the views of the insurance industry as expressed through its association. Any Government must do that.
I know that my hon. Friend has some feelings about trade associations. Perhaps in another context one might like to debate that matter with him. At the same time, Governments have to work with industries. Basically, they must consult trade associations as being representative bodies. Governments do not have time to consult every company. By and large, the views put forward by trade associations must be treated with great respect by any Government as broadly representing the views of the industry. This has happened with the CBI, the TUC and many other important public bodies.
Although the hon. Member may not be entirely satisfied, I hope that he will see fit to withdraw the amendment. We have examined this matter between Committee and Report, as I promised we would, and we have arrived at a conclusion. Although that conclusion may not satisfy him, at least it is reasonable in all the circumstances, given the fact that this is a rather disparate industry. This is the first Bill of its kind that imposes a levy on the industry.
§ Amendment, by leave, withdrawn.