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A taxing year for life assurance Back  
The pace of change in 2000 has been swift for life assurance but Michael Brennan sees that the industry is still smiling.
Perhaps one should expect change when a new millennium dawns but even the most forward looking in the Life Assurance industry must have been a little taken back by the sheer volume of change which faced the industry in 2000.

This change extended beyond the reverberations of the Celtic Tiger’s roar, which has shaken all parts of the economy, and instead affected some of the supporting pillars on which the current Life Assurance industry has been built.

Neither am I referring here to important matters such as the e-commerce revolution which appeared poised to sweep all before it in the first half of the year, or the advent of Euro notes and coins in January 2002 which requires a two-year program of work involving the translation of all information systems and documentation. All the above made the year 2000 one to remember for all business sectors in the economy but, for the Life Assurance sector there was more, a lot more, in the mundane guise of tax and disclosure.

Tax yes but no, not DIRT. The Life Assurance industry did not feature in the DIRT tribunals which jostled for the headlines with other competing tribunals in the early part of the year. In fact, the Life Assurance industry had an exemplary record of paying its taxes not only in the nineties but also in what may come to be known as the ‘evading eighties’. Also there was no suggestion that the non-resident policyholders of the IFSC life sector were anything but, well, non-resident.

However, this did not save the Life Assurance industry from being hit by some of the retribution handed out to the banking sector and in this respect perhaps being included in the collective phrase ‘financial institutions’ has a lot to answer for. The new dormant account rules will apply not only to dormant bank accounts but also to ‘unclaimed insurance policies’ after 15 years, which may cut across the fundamental long-term nature of whole of life insurance contracts.
Furthermore, as things stand it appears that in future even non-national and non-resident policyholders at the time a policy is effected will be expected to pay an exit tax on all their savings through life insurance policies should they be resident in Ireland at the date of claim.

The overall tax news for policyholders, however, has been positive. From January 2001 the move to a gross roll-up of investments within a life insurance policy is similar to the situation for pension funds, but has free access to savings at any time albeit with an exit tax at the standard rate plus 3 per cent. Life Assurance companies will, as a consequence, lose the ability to offset their expenses against the internal tax charge on investment income from new savings policies.

This will cost the industry additional tax in the short-term but the increased opportunity for growth in the life savings market should offset this over time.

The product design and marketing implications of the new gross roll-up tax regime are also very significant. Consumers are expected to be even more careful in their choice of Life Assurance company because an exit tax will make it penal to change provider if investment performance is not good. Consumers are therefore likely to favour, for their investments, companies that have demonstrated a good track record in managing gross pension funds, which will now for the first time be open for savings, and they will also look for a wide range of funds. My own company, Eagle Star, has already launched new products to meet the expected demand in the new year and a number of other companies are expected to follow. Having access to good quality independent advice from an insurance broker is likely to be critical in making the right choice.
Consumers will also have additional information to assist them in choosing a provider and in assessing the independence of the advice they receive. This information will come in the form of new documentation disclosing both Life Assurance company charges and intermediary remuneration. It has still not been made absolutely final as to the exact scope and form of this disclosure and the types of products which will be covered by it, although it now seems practically certain that the new disclosure rules will apply at least to some extent from January 2001.

For some Life Assurance companies change in 2000 was even more far-reaching as a result of the continuing consolidation of the industry. Guardian Life was acquired by Royal Liver while the long established and respected Norwich Union name disappeared into the new Hibernian Life.

Given all the above change and challenge, why are people in the Life Assurance industry looking so happy? The answer is that 2000 has been a great year for business with tremendous growth across the pensions, savings and protection markets. That is one thing no one will want to see changed in 2001.

Michael Brennan is managing director at Eagle Star Life Assurance.

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