Upcoming changes to gender-based pricing will create opportunities, but beware the end of the I-E tax regime, writes Jennifer Gilchrist, senior product development manager at Scottish Provident
While many people will be counting down the days to Christmas, for those working in financial services, the countdown is a very different one.
It might be 11 weeks to the festive period but it is only 10 weeks to the end of gender-specific pricing (G-Day). Add to that the Retail Distribution Review (RDR) and the changes to the income minus expenses system (I–E) which are fast approaching and there is a lot of preoccupation with the new legislation about to hit the industry.
The build up to G-Day has seen a great deal of emphasis placed on encouraging female clients to buy insurance or renew their policies before prices increase. While this has not necessarily resulted in queues of women lining up to buy life insurance before the deadline, it has created an opportunity for advisers to reinforce the value of their advice.
For those advisers who have not seized the opportunity there is still time. Many providers have set up microsites dedicated to the gender directive, where advisers can get marketing support and information that will help explain the impact to clients.
And as we move closer to the deadline, providers have started to announce how they will deal with pipeline business. This is welcome news for advisers, who will be relieved they can let clients know how the new rates will affect them. So the countdown to G-Day is on. But just to make things more challenging, it will come into effect at the same time as completely separate legislation, the end of the I-E tax regime.
In the March 2011 budget, the chancellor announced plans to create a new tax regime for the protection industry that will tax providers based on their profits. Currently, insurance companies are allowed to offset the costs of their life assurance business from profits made on their investments, a situation known as ‘income minus expenses’ or ‘I-E’. But, with effect from 1 January next year, protection business will be removed from ‘I-E’ and brought into line with tax regimes in other industries. This is likely to push up life assurance costs for insurers.
In practical terms, protection business generates a trivial amount of ‘I’ (since there is no investment element, the only investment returns generated are those on the reserves providers set up) but a lot of ‘E’ (all of the expenses plus the commission providers pay advisers counts as expenses). This means protection business currently receives a tax credit that can be used to reduce the tax providers pay on their investment returns.
Providers can therefore allow for this tax credit when calculating profit provided they are confident they will generate sufficient investment returns.
So, who pays for the tax changes and what effects will this have on clients and advisers? Providers could maintain commission rates or reduce them, perhaps to the level of income protection business or in proportion to the premium increase.
Because of the different options that might be selected by providers and the need to be competitive both on premiums and commission levels it may take some time before things settle down after the change. The most likely effect in the short term is, therefore, a combination of premium increases and, due to the simultaneous effect of the gender directive, subtle commission changes, while providers work out their competitive position.
So there are interesting and challenging times ahead for the protection world but the main message is clear: seize the opportunities before G-Day and continue to reinforce the value of advice after 21 December too.
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