Lloyd’s Claims Equalisation Reserves
26 November 2008
Following over two and a half years of lobbying by Lloyd’s, the Government announced in the Pre-Budget report that it will align the tax treatment of Lloyd’s corporate members’ reserves with that of other general insurers. Lloyd’s has welcomed this measure that will contribute to its ability to compete globally.
Commenting on the announcement, Lord Levene said: "We welcome this decision that finally brings the tax treatment of Lloyd's reserves into line with other UK insurers and will contribute to Lloyd's ability to compete globally. We are grateful to the Treasury and HMRC for their support in introducing this change."
Since 1996, general insurers have had to put up Claims Equalisation Reserves (CERs) for solvency purposes, which requires them to set aside premiums on certain types of volatile classes of business in profitable years to provide a cushion against periods with worse than average claims.
Tax relief is available for amounts transferred into the CER with the effect that some volatility of the tax result is removed. Lloyd’s is not required to set up CERs for solvency purposes, as when they were introduced for general insurers in 1996 Lloyd’s was deemed to be adequately capitalised. As a result, Lloyd’s has not historically been able to take advantage of this tax relief.
The new legislation means that Lloyd’s Corporate Members will in future benefit from a tax relief for CERs. Unlike general insurers, however, Lloyd's will not be required to create a CER for solvency purposes, recognising that the Lloyd's capital regime ensures members are already adequately capitalised.
The legislation will apply to profits treated as arising in the year ended 31 December 2008 and, as far as possible, will mirror the tax regime as it applies to general insurers with adaptations to take account of Lloyd’s unique structure.
Little detail is available at present as to how the CERs for Lloyd’s Corporate Members will operate, but this will be explored further with the Treasury over the coming months. In particular, it is presently unclear whether partners of LLPs and SLPs will be able to establish a claims equalisation reserve for tax purposes. The relief will not apply to individual members who already benefit from the Special Reserve Fund, which has a similar effect.
Looking forward to Solvency II, general insurers will no longer be required to put up CERs for solvency purposes. However, Lloyd’s has been lobbying for the extension of tax relief on CERs beyond the introduction of Solvency II and yesterday the Government also announced that it will review the case for such an extension.
Lloyd’s will continue to work with HM Treasury and HMRC on this.
Last updated on 27 Nov 2008
