Equalisation Reserves (Hansard, 27 April 1995)

§ Mr. Jonathan Evans

In his speech on Second Reading of the Insurance Companies (Reserves) Bill, my hon. Friend the Member for Hertfordshire, North (Mr. Heald) indicated that the Government proposed to issue a consultation document in the spring to invite comments on proposals for regulations introducing a requirement for equalisation reserves for some types of non-life business. I am pleased to be able to tell the House that the DTI and Inland Revenue are today jointly issuing the consultation document to which he referred. Copies have been placed in the Libraries of both Houses.

The insurance industry has argued for some years that it is at a disadvantage compared to its overseas competitors because some countries allow tax relief on transfers made into equalisation reserves for non-life business. These representations have been made in the light of the emerging single European market in insurance, and in particular the EC third non-life directive, which came into force on 1 July 1994 and which enables insurers to operate anywhere throughout the Community under a single authorisation and regulation by their home state. In some EC member states insurers are able to build up equalisation reserves free of tax to assist them in responding to exceptional claims and many UK companies believe this gives such companies a competitive advantage both in European and world insurance markets.

Claims equalisation reserves are used to set aside funds in good years to assist the meeting of losses in bad ones, resulting in a smoothing of insurers' underwriting results over time. Much insurance business that can suffer catastrophe or exceptional claims is written as one year contracts and taxed on the results for a single year. It is in the nature of such business, however, that its true profitability emerges only over a longer period. It is therefore argued that tax should be able to be deferred in respect of prudential sums set aside to reserves in good years since such sums are not really profit at all but will be needed to pay claims in bad years.

The supervisory proposals in the consultation document could be the basis of regulations if the provisions of the Insurance Companies (Reserves) Bill become law. The consultation document suggests that it would be appropriate for companies writing certain types of business to set aside a certain proportion of net written premium each year up to a maximum limit based on the amount of premium written over five years. Withdrawals would be triggered when a company's claims ratio for a financial year exceeded a set amount. The types of business which it is proposed be covered are: property, consequential loss, mortgage indemnity, marine, nuclear, proportional reinsurance of that business and all non-proportional reinsurance.

I am grateful to the industry, and in particular to the Association of British Insurers, for the work done to assist the development of these proposals. We hope that all interested parties will consider the proposals carefully and indicate whether they are content to proceed on that basis. 661W Representations should be sent by 7 July 1995 either to the DTI or the Inland Revenue.