The Solvency Assessment and Management (SAM) regime will, similar to long-term insurers, be introduced in 2016. SAM is a risk-based supervisory framework, and requires the insurer to invest in a manner that is appropriate to the nature of its liabilities and make provision for certain reserves to be kept. Under the SAM framework, all future income on a policy is recognised upfront and is not suitable as a basis for calculating tax as it is inconsistent with general gross income principles.
Section 28(3)(a) of the Income Tax Act allows a short-term insurer to claim a deduction for reserves calculated in terms of section 32(1)(a) of the Short-term Insurance Act in respect of outstanding claims reserves (OCR) and claims incurred but not yet reported (IBNR). In addition, section 28(3)(b) allows a deduction for reserves in respect of unearned premium provisions (UPP) calculated in accordance with section 32(1)(b) of the Short-term Insurance Act and contains a provision that the reserve for a cash back bonus must be based on the regulatory regime for short-term insurance.
IBNR will no longer exist under SAM as future reported claims are captured within the expected future claims cash flows. A new Insurance Act will also be promulgated in 2016 and will replace certain sections of both the Short Term Insurance Act and Long-term Insurance Act. This will result (specifically for short-term insurers) in the repeal of the current provisions of section 32(1) of the Short-term Insurance Act, which at present regulate deductions allowed under section 28(3) of the Income Tax Act.
Solvency II, the equivalent to SAM followed by other countries, either use IFRS or their country’s accounting standards as the basis for determining the tax liability of a short-term insurer. IFRS 4, which is the IFRS standard that governs the accounting of insurance business, does not prescribe what liabilities must be disclosed. However paragraph 22 of the Implementation Guidance provides that appropriate sub classifications of insurance liabilities will depend on the circumstances, and might include items such as unearned premiums, claims reported by policyholder and IBNR.
Consequently, it is proposed that section 28(3) of the Income Tax Act be amended in order for a short-term insurer to claim deductions that were recognised as liabilities for purposes of IFRS, specifically relating to OCR, IBNR and unearned premiums. Deductions that will be allowed relating to OCR and IBNR will be the net amount after the short-term insurer had reduced the amount by which the short-term insurer estimates will be paid in respect of those claims under policies of reinsurance.
The amendment will come into operation when the Insurance Act, 2016, is promulgated.