Risk Management (December 01, 2010)

IMPACT OF SOLVENCY II ON GLOBAL INSURERS WILL BE “PROFOUND”: WILLIS RE

The impact of Solvency II will be “profound” on the global (re)insurance market, and most companies will likely find their regulatory capital constrained for the first time, according to Willis Re.

The fifth and final quantitative impact study (QIS5) of Solvency II was launched in August 2010, Willis Re notes in its report, QIS5: Solvency II Nears the Finishing Line.

QIS5 forms the core of the standard solvency capital requirement calculation when Solvency II comes into force.

The capital requirements under QIS5 are significantly higher and more rigourous than those set out in the previous impact study, QIS4, said the Willis Re report. And QIS4 requirements were no picnic.

“Currently few firms in Europe are regulatory capital constrained under Solvency I regulations,” the report says. “The QIS4 exercise in 2008 was completed by more than 1,400 firms across the European Economic Area. Of these, 11% failed to meet the solvency capital requirement and QIS5 is expected to produce higher failure rates.”

CRA CLARIFIES TAX CONFUSION AROUND “EXEMPT INSURANCE COMPANIES” IN BARBADOS

Clarifying confusion in risk management circles, the Canada Revenue Agency (CRA) has confirmed business income earned by “exempt insurance companies” (EICs) in Barbados may generally be repatriated to Canada free of Canadian tax.

An EIC is a company licensed under the Barbados Exempt Insurance Act (BEIA) to carry on “exempt insurance business,” defined as “the business of insuring risks located outside Barbados in respect of which premiums originate outside Barbados,” according to a Nov. 12, 2010 online posting by the Osler Tax Group.

Under Canada’s Income Tax Act, “exempt surplus” dividends from a foreign affiliate may generally be received by a Canadian corporate shareholder free of Canadian tax, as long as the foreign affiliate is “resident” in a designated treaty country.

Under the Canada-Barbados Tax Treaty, residency depends in part on whether or not the company is liable to pay taxes in Barbados.

Initially, the CRA held an EIC was effectively exempt from taxation in Barbados for a guaranteed period of 30 years, and thus not a “resident” under the Canada-Barbados Tax Treaty. But the CRA’s most recent clarification now agrees that EICs are “liable to tax” in Barbados within the meaning of the countries’ tax treaty.