Though it is home to the world’s third-largest insurance
industry, the UK will have to take a long, hard look at its tax
regime if it intends to remain competitive globally. If it does
not, warns the Association of British Insurers, there is a very
real danger of an exodus of insurance companies and industry
executives.

 

Insurers and industry executives could leave the UK in droves if
the government does not act to improve the competitiveness of the
country’s tax regime, warns the Association of British Insurers
(ABI), which bases its view on an extensive survey of UK insurance
executives.

Indicative of the seriousness of the situation, the ABI’s survey
revealed that only 7 percent of respondents rate the UK as a “very
attractive” place to invest compared with 39 percent who view it as
a “fairly unattractive place to invest” and 3 percent who view it
as a “very unattractive place to invest.” The balance of
respondents (51 percent) view the UK as a “fairly attractive” place
to invest.”

Notably, insurers generating less than half their premium income in
the UK are more likely to find the UK fairly or very unattractive –
46 percent compared to 38 percent for those with more than half of
premiums coming from the UK. A major source of business, some 20
percent of the UK insurance industry’s premium income comes from
abroad. In 2008, according to the ABI, foreign-generated premium
income totalled £54 billion ($86 billion) of which £38 billion was
long-term business and £16 billion general business.

Corporate tax burden

A major reason for the UK’s failure to inspire investment
enthusiasm is its corporate tax system, which 14 percent of
respondents labelled “very uncompetitive” and 57 percent “fairly
uncompetitive.” Only 28 percent of respondents view the tax system
as “fairly competitive” and a mere 1 percent view it as “very
competitive.”

Dissatisfaction was again higher among insurers generating less
than half their premium income in the UK, with 76 percent viewing
the tax system as very or fairly uncompetitive compared with 65
percent that generate over half their premiums in the UK.

Failure to respond for the need for a liberalisation of the
corporate tax system could have serious consequences for the UK
insurance industry, stressed the ABI. The association’s concern is
well founded with 81 percent of insurers predicting a sharp or
slight fall in the number of insurers domiciled in the UK over the
next five years if corporate tax system is not made more
competitive.

Among insurers generating less than half their premium income in
the UK, 39 percent predict a sharp fall in insurance company
numbers while 19 percent those generating over half their premiums
in the UK anticipate a sharp fall.

This holds potentially serious consequences for the insurance
industry and the UK’s economy. According to the ABI, the insurance
industry currently employs 313,000 people and in 2007 contributed
£9.7 billion in tax revenues to the UK, paying the third-highest
corporate tax of any sector.

In its study the ABI noted that findings of its survey come at a
time of change in global attitudes to tax havens, especially in
North America, that has led to a challenge to the traditional homes
of reinsurers, such as Bermuda. This change, stressed the ABI,
provides a specific opportunity for the UK to attract a much larger
share of the global wholesale and reinsurance market. The ABI noted
that no major reinsurance company is based in the UK while the
country hosts only 10 percent of total global reinsurance
capital.

To prevent contraction of the UK’s insurance industry and enhance
growth prospects the ABI proposes a number of changes
including:

• Introducing a corporate tax exemption for insurers with branches
abroad to encourage companies to keep or set up their headquarters
in the UK;

• Reforming controlled foreign companies’ rules;

• Recognise the importance of capital to insurance and reinsurance
businesses by moving the bias away from returns from labour and
towards returns from capital;

• Reducing corporate tax when fiscal conditions allow;

• Ensuring that any tax changes in response to Solvency II result
in a stable and sustainable system and do not endanger UK
competitiveness against other EU locations.

• Introduction of a tax loss system to address the volatility of
insurance results; and

• Government must commit to a stable, predictable tax system, with
only essential changes to be made following early
consultation.

The ABI recommended the corporate tax rate be cut from 28 percent
to 25 percent, noting that while 28 percent of respondents are not
domiciled in the UK for tax reasons their prosed cut would tempt 19
percent back. Cutting it to 20 percent would tempt 38 percent
back.

Executive exodus risk

It is not only a threat of an exodus of insurance companies that
the UK faces, but of senior insurance personnel as well. Again the
tax system is a major cause of this threat.

Of particularly concern is that high income earners’ tax burden has
increased significantly with tax on earnings above £150,000 a years
set to rise from 40 percent to 50 percent from April 2010. In
addition, anyone earning over £100,000 a year will no longer be
able to claim personal allowances, currently about £6,500
annually.

In its survey the ABI quizzed respondents on their response to the
tax hike. A significant 26 percent said it would seriously temp
them to move abroad for work while 37 percent said it would
slightly tempt them to do so. Only 5 percent of respondents replied
that they would definitely remain in the UK for work.

In its recommendations ABI stressed that the government must
recognise that the higher rate of income tax and restriction of
personal tax relief of high earners reduces the UK’s attractiveness
as a place to work for company executives.

In the ABI’s survey half of the executives polled represented
insurers with total assets of above £500 million.

ABI survey response