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London looks to change tax rates to lure and retain reinsurance business


A U.K. government drive to attract and retain reinsurance business in London has been welcomed by market participants concerned about competitive threats posed by other jurisdictions.

Renowned as a leading domicile for global reinsurers, London began losing ground in the late 2000s to jurisdictions with more favorable regulatory environments, prompting a study by the London Market Group. A report on the study's findings, released this fall, highlighted the loss of market share of worldwide reinsurance as one of the key risks facing the London market.

In response, U.K. Chancellor of the Exchequer George Osborne set up a working group to “explore options to ensure that the U.K.'s regulatory and tax regime is as competitive as possible to attract more reinsurance business to the United Kingdom,” he said.

The group is headed by Michael Wade, a Lloyd's of London veteran who founded CLM Insurance Fund P.L.C., one of the first corporate capital vehicles at Lloyd's, among other things. Mr. Wade will present a report on its interim findings before the budget in spring 2015, Mr. Osborne said during his autumn budget statement in late November.

In its report, the London Market Group — which is made up of representatives of the International Underwriting Association, Lloyd's and the London & International Insurance Brokers' Association — said London has been losing its market share in reinsurance, which fell to 13% in 2013 from 15% in 2010, because of increasingly centralized buying strategies of cedents and the increasing use of local hubs, among other factors. Tax and regulatory regimes applied to insurance and reinsurance companies needed to be “proportionate” if London is to maintain a competitive position, it added.

Mr. Osborne's actions drew a positive response from market observers.

“I am encouraged by the chancellor's commitment to ensuring the government delivers the right environment to encourage further growth in our market,” said Steve Hearn, chairman of the LMG and deputy CEO of Willis Group Holdings P.L.C.

He said it was heartening to see that the “significant contribution” that the London insurance and reinsurance markets make to the U.K. economy “is being recognized by government and that it is willing to explore ways it can help us continue to thrive.”

Dave Matcham, CEO of the IUA — which represents underwriters in the London company insurance market — said the association fully supported the chancellor's aim to attract more reinsurance business to London and “looks forward to contributing to this debate.”

It is important to ensure that any regulatory action is appropriate to the way insurers and reinsurers operate and not be styled on the needs of the banking system, Mr. Matcham said.

Colin Graham, U.K. insurance tax leader at Pricewaterhouse- Coopers L.L.P. in London, said the chancellor's announcement is an exciting development coming so soon after the LMG report.

Around 2007 and 2008, a spate of London-based reinsurance companies — notably several in the Lloyd's market — opted to redomicile to jurisdictions such as Bermuda, Dublin, the Netherlands and Luxembourg, prompted, in large part, by the lure of more attractive tax and regulatory regimes, Mr. Graham said.

At that time, U.K. corporation tax was relatively high — about 30% for many companies — and profits on business derived overseas also were taxed in the United Kingdom, he said. This made the U.K. tax regime for reinsurers relatively unattractive when compared with other domiciles with low or no corporation tax and no tax on overseas earnings.

Since the current coalition government made up of the Conservative and the Liberal Democrat parties took over in 2010, steps have been taken that reduced the corporation tax rate for many companies, and the “headline corporation tax rate” is now about 20%, Mr. Graham said.

While this still is substantially higher than in some of London's rival reinsurance centers, the reduction in the tax burden, coupled with other advantages of doing business in London, once again makes London a compelling proposition for reinsurance companies evaluating where to headquarter themselves, he explained.

Reinsurance companies will welcome Mr. Osborne's moves to ensure the U.K. is a competitive place for them to do business, Mr. Graham said.

But he cautioned that other moves announced in the autumn statement, such as a commitment to ensure that overseas firms do not avoid U.K. tax on profits earned in the United Kingdom, are not introduced in such a way as to disadvantage reinsurance companies.