Budget 2011: Reserve tax relief ‘could save insurers £500m’

The UK Government’s decision not to abolish tax relief on so-called claims equalisation reserves has saved general insurers in excess of £500m, according to accounting firm PwC.

“It is very encouraging that the government appears committed to retain relief for claims equalisation reserves,” said PwC insurance tax partner Colin Graham. “Tax relief for these reserves is worth in excess of £500m for the UK general insurance industry and withdrawal of this relief would have been a blow to competitiveness.”

He added: “It is a very positive sign that government has been listening to the concerns raised by industry.”

Claims equalisation reserves (CER) are built up by insurers in good years to help cushion results against spikes caused by extreme loss events such as catastrophes. They are used in particular by specialty insurers such as Lloyd’s underwriters, which can incur large losses from single events.

In the 2011 budget, the government said it would “look to industry to give a robust justification for continuing the CER tax relief” and, dependent on this, would intend to legislate to retain the relief.

The case for CERs will be reviewed again in light of future insurance accounting developments.

New international financial reporting standards (IFRS) for insurance contracts are expected to come into force in 2014. Some observers expect the new accounting rules will effectively do away with equalisation reserves.

In addition to the CER relief, the UK government also intends to consult the insurance industry on the timing of the tax deduction for Lloyd’s member level stop loss insurance premiums. Stop-loss insurance aims to cap the user’s losses from an insured event at a specific point.