Insurers say they have been landed with a £250m tax timebomb following changes buried in the detail of Chancellor Gordon Brown's budget.

The tax changes enable the Chancellor to claw back what amounts to a tax break on insurers' provisions for unpaid claims. The measure is being opposed by the ABI, Lloyd's of London and the International Underwriting Association who jointly describe it as a new "stealth tax" on insurers.

Marie-Louise Rossi, chief executive of the IUA, claims the reform will "damage the competitiveness" of the UK insurance industry.

"It will hit hardest those classes of business where risks are most volatile and where protection is most necessary," she said. Those classes most likely to be affected are long-tail liabilities such as asbestos claims.

The measure follows a tax tribunal case on the issue last year, which Lloyd's won, on the tax-exempt status of premiums deducted by syndicates for reinsurance to close.

The rule change, if approved, will affect the funds insurance companies maintain for unpaid claims, claims handling expenses and unexpired risk reserves or, in the case of Lloyd's, reinsurance to close contracts. In future, companies and Lloyd's members will have to pay a sort of interest charge on any tax deferred if they have enjoyed a level of relief greater than the value of any claims made.

The Inland Revenue stress the measure will apply to insurers who "significantly overestimate" the provisions they make for claims settled in future years. The change comes into effect from January 1, 2001, for insurance companies and the 2001-2 tax year for members of Lloyd's. It will not apply to life assurance funds or mutual insurance companies.

Most individual members of Lloyd's are likely to be exempt from the rule providing they underwrite less than 4% of a syndicate's business.

The regulations will be made by the Chancellor under delegated powers included in the Finance Bill.

A spokeswoman for the Inland Revenue said the tax would yield an estimated £250m by 2011.

Explaining the reason for its introduction she said: "The reform brings UK insurance companies into line with other insurance markets in a number of European countries including Italy, and the United States and Canada."

However, the Inland Revenue has said it will consult widely before introducing the measure to keep compliance burdens to a minimum.

Peter Stokes, Ernst & Young partner in insurance, said: "UK insurers potentially face two options, either they can discount their reserves from next year in respect of tax or, pay what amounts to an interest charge on their undiscounted reserves. But if they discount too heavily they could end up paying more tax than they need to, since forecasting claims is difficult."