Tax and regulatory news

UK IPT rise may be just the beginning The recent 3.5% increase to the UK's standard Insurance Premium Tax rate is just another example of IPT on the rise, with the insurance industry anticipating future rate hikes both in the EU and worldwide. Head of IPT at TMF Group, Paul Hampton said: "UK insurers (and insureds) enjoy one of the lowest IPT rates in Europe, even with the November 1 standard rate increase to 9.5%. This rise may not be the end, in Britain and beyond." In 2015 alone, insurance tax rates increased in European countries including Malta, Slovenia, Italy and the UK, according to TMF. In July 2015 in Greece, the default IPT rate rose overnight from 10% to 15%.hide"There has been some speculation in the UK insurance industry of a possible long-term plan to bring the IPT rate in line with the VAT rate; we have already seen it happen in the Netherlands, where the IPT rate went up from 7.5% to 21% in less than a decade," said Mr Hampton. "Over the past 10 years we have seen a marked trend for EU countries to increase the taxes they levy on insurance, and there is no indication that this upward trend is abating." TMF has produced a 10th anniversary briefing paper, 'IPT in the spotlight: past, present and future,' in which TMF Group's team of experts examine the IPT market in Europe and beyond over the past ten years, and consider what the next decade holds for the insurance industry. "As insurance companies in emerging economies get increasingly involved in multinational business, and governments look to generate higher tax receipts whilst enforcing regulation more prescriptively, it is not unreasonable to anticipate increasing insurance tax rates across the globe. The challenge for insurers, brokers and insureds will be to navigate this complex tax environment, and remain compliant," said TMF Group. IPT error could hit underwriting profits Fiscal Reps has warned of the potential costs of an Insurance Premium Tax (IPT) error. IT said that based on a typical IPT rate across Europe of 15%, and an average Combined Operating Ratio (COR) of 95% across the majority of the UK insurance market, a 5% IPT error could reduce underwriting profit by 15%. Mike Stalley, FCA, Founder and Chief Executive of FiscalReps, said: "The impact of an IPT error could cause a significant drop in underwriting profits. These costs would be in addition to the non-financial costs that a company could suffer, including the effect on its reputation, statutory audit concerns and internal morale. Management time costs involved in rectifying the error also need to be considered, as well as the eligibility of some policies if taxes and levies remain unpaid." Fiscal Reps noted while the UK IPT rate still remains one of the lowest in Europe, rates across all of Europe are continuing to increase, as governments shift their focus from direct to indirect taxation. Mr Stalley added: "There is a growing demand from clients for detailed knowledge of IPT in international markets. Businesses want to make sure that they are paying the right amounts to the right authorities so that all indirect costs and charges can be fully accounted for. This is a constantly evolving area that requires a detailed understanding to ensure that all compliance processes on a local, national and international level are effective." US/EU negotiations on covered agreement on (re)insurance to start The US Treasury, together with the US Trade Representative, have said they intend to begin negotiations with the EU for a covered agreement on (re)insurance. The intention is to afford nationally uniform treatment to all EU (re)insurers operating in the US. Cristina Mihai, head of international affairs and reinsurance at Insurance Europe, said: "Insurance Europe is pleased that negotiations can finally begin for a covered agreement on (re)insurance between the EU and the US. In particular, Insurance Europe welcomes the intention to afford nationally uniform treatment to all EU (re)insurers operating in the US. At the same time, it hopes that the final agreement will be ambitious and will include equal treatment for both EU and US (re)insurers, by eliminating the current discriminatory collateral requirements that are applied to EU (re)insurers." EIOPA concerned about financial instability The European Insurance and Occupational Pensions Authority (EIOPA) has published its second biannual report on financial stability in the (re)insurance sector of the European Economic Area. EIOPA noted a challenging macro-economic and financial environment with persistent low interest rates. It was also concerned about the 'double-hit scenario' as it would "lead to a situation where the value of assets decreases whilst the value of liabilities increases causing severe negative implications for the sustainability of the European (re)insurance sector." EIOPA said low yields and a resultant subsequent reinvestment risk (i.e. the impossibility to re-invest with the same return) remain the main vulnerability. The current low interest rate environment puts pressure on the profitability of companies and forces them into a 'search for yields' behaviour. However, this was offset by the upcoming Solvency II regime which will increase the resilience of the European insurance industry and will bring better alignment of risk and capital management, said EIOPA. Gabriel Bernardino, Chairman of EIOPA, said: "In line with its mandate to preserve financial stability in the European Union, in 2016, EIOPA will launch the third biennial EU-wide stress test for insurers. Particularly taking into account the macroeconomic reality, this exercise will focus on two adverse scenarios, namely: the prolonged low yield environment and the "double-hit" scenario. I am confident that the shocks included in this exercise will allow EIOPA and national supervisors to elaborate on appropriate measures to mitigate these key risks and define areas for further investigation." EU-US Insurance Project focus on Group Supervision The EU-US Insurance Project has produced an overview of 2015 'Activities Involving the Topic of Group Supervision.' It said the Technical Committee on Group Supervision (TC2) has made significant progress in 2015 on a number of fronts, including furthering the exchange of technical information relating to the supervisory regimes in the EU and in the US, focused on the tasks and responsibilities of group-wide supervisors. It explained that a high degree of commonality exists between the two regimes as to tasks and responsibilities of group-wide supervisors. There was also a focus on the Own Risk and Solvency Assessment (ORSA). "Both sides face some common challenges in optimising the usefulness of ORSA in transatlantic supervisory colleges, and expect that 2016 will bring additional experience and more fruitful results. Commonalities exist among the two regimes as to the principle objectives of the regulatory review of the ORSA, i.e., to understand the group's business strategy, its risk management and capital management," said the Project. Additional exchanges during 2015 related to information from the NAIC/states as to data collection and financial analysis tools, processes, insurer profile summary and group profile summary, and from the EU-side regarding data collection on groups. The EU-US Insurance Project started in early 2012, when the European Commission, the EIOPA, the US National Association of Insurance Commissioners and the Federal Insurance Office of the US Department of the Treasury agreed to participate "in a deeper dialogue to contribute to an increased mutual understanding and enhanced cooperation between the EU and the US to promote business opportunity, consumer protection and effective supervision." DWF to open regulatory office in Brussels Law firm DWF is opening an office in Brussels to provide greater competition and regulatory support to its global clients, including insurers, brokers and risk managers within major multinationals. DWF's Brussels office will be led by partner and Head of EU & Competition Jonathan Branton, who formerly spent ten years practising in Brussels and is independently recognised as a leading EU/Competition practitioner. The office will be further supported by Brona Heenan who has been based in Brussels for nearly 20 years and has longstanding experience in EU and Competition matters having represented numerous parties in European Commission investigations as well as dealing with National Competition Authorities. EIOPA: supervisory convergence is underway The journey towards supervisory convergence has begun, according to Gabriel Bernardino, Chairman of EIOPA, in a recent speech. He said the challenges while achieving convergence will be diverse including legal, financial, technological, organisational and, most of all, cultural. "But we can overcome those challenges if we all have the same vision and work for the same goal: to create a truly level playing field in the internal market for the ultimate benefit of consumers and the financial stability in the EU," he said. He explained that EIOPA and national competent authorities (NCAs) have different roles in achieving convergent supervision. He said NCAs are responsible for the day-to-day oversight and for the daily supervision of cross-border insurance groups, which is done through the colleges of supervisors. And it is NCAs that are engaged in regular dialogues and discussions with companies. He stressed that EIOPA neither substitutes national supervisors, nor intends to directly intervene in their work. "EIOPA provides an added value to the national authorities. First of all, building on the new harmonised Solvency II reporting, EIOPA is going to set up a comprehensive information system. With this system the European supervision will receive a strategic asset, allowing to further developing the capacity to provide reliable risk analysis and early warning indicators, both at individual, group and system-wide level," said Mr Bernardino, adding that the work will improve the supervisory understanding of cross border groups. He also revealed that EIOPA is developing a Supervisory Handbook with the objective to build an array of good supervisory practices on different areas of Solvency II. He concluded: "The co-existence of EIOPA and NCAs can be compared with the ground and the roof of the same building. We are two absolutely different architectural elements, but without one of us the building sooner or later will turn into ruins. At the same time I see the mission of EIOPA's as twofold: on one hand to be of added value for national supervisors and to their supervisory processes and on the other hand - to challenge their approaches and practices." GFIA calls for 'new and ambitious' TiSA The Global Federation of Insurance Associations (GFIA) has reiterated its strong support for a 'new and ambitious' Trade in International Services Agreement (TiSA), following recent negotiations. GFIA said the agreement should be consistent with the objectives of the General Agreement of Trade in Services rules, and aim to include a large and diverse membership, including large and emerging economies. Brad Smith, chair of the trade working group of GFIA, said: "GFIA urges the nations involved to include commitments that are specific to the insurance and reinsurance sector. Among others, TiSA should provide for full, open market access and national treatment for admitted companies and promote access for insurers without commercial presence when the risk is inherently global, such as risks covered by reinsurance and marine, aviation and transport insurance." He went on: "At the same time, TiSA should support development of the global reinsurance system and prohibit forced localization of reinsurance in any form or measures that discriminate against the provision of cross-border reinsurance by financially strong, well regulated, foreign reinsurers, taking into account the fundamental prudential benefit that global reinsurance provides for risk diversification." And he added: "An open reinsurance market creates opportunities for risk diversification so that ceding insurers do not end up with reinsurance recoverable concentrations from a small number of reinsurers. This makes insurance markets more competitive and financially strong and helps provide price and product advantages and choices to consumers." New management board members at EIOPA The Board of Supervisors of the European Insurance and Occupational Pensions Authority (EIOPA) has elected three members of EIOPA's Management Board: Julia Cillikova, Director of the Regulation Department of the National Bank of Slovakia; Frank Grund, Chief Executive Director of the German Federal Financial Supervisory Authority (BaFin); and Misu Negrițoiu, President of the Romanian Financial Supervisory Authority. They will replace Jan Parner, Deputy Director General of Finanstilsynet (Denmark) and Sergej Simoniti, Director of Insurance Supervision Agency (Slovenia), whose terms of office expire, as well as Felix Hufeld, who resigned from the Management Board due to his new position as the President of BaFin. The Management Board of EIOPA is composed of the Chairman of EIOPA and six other members of the Board of Supervisors, elected by and from the voting members of the Board of Supervisors. SII ratios 'will not always reflect economic capitalisation of insurers' Reported Solvency II ratios will not always reflect economic capitalisation of insurers, according to Moody's Investors Service. "Solvency II ratios may underestimate or overestimate insurers' actual economic capitalisation because of the challenges in calibrating all risks on a pure economic basis at a 99.5% confidence level and the impact of the transitional measures agreed to smooth Solvency II implementation," explained Moody's. As a result, the emphasis that Moody's will place on Solvency II ratios in its assessment of insurers' capitalisation will vary, notably by category of insurer. In the Solvency II Directive, which comes into force on January 1 2016, capital requirements are defined as the amount of resources needed to absorb all economic losses with a probability of 99.5%. "On the basis of this economic approach, we have evaluated that a 100% Solvency II ratio is consistent with a low Baa level of capitalisation and a 200% ratio is consistent with a low Aa level of capitalisation," said Benjamin Serra, Moody's Vice President and Senior Credit Officer. "However, the calibration process and transitional measures have partly taken the Solvency II ratios away from a pure economic view." Moody's said it intends to place little emphasis on Solvency II ratios with transitional measures in its assessment of economic capitalisation, because it considers the transitional measures to be not economic. The rating agency will place more emphasis on Solvency II ratios without transitional measures (or 'fully loaded' ratios), when it considers that the Solvency II calibration is economic, i.e., when the ratio captures and reflects well the risks specific to an insurer. The degree of emphasis Moody's will place on 'fully loaded' Solvency II ratios depends on the typology of insurers. In particular, Moody's expects to gradually increase the emphasis it places on fully loaded Solvency II ratios in its analysis of P&C insurers and reinsurers.

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