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A change in the wording of the delegated acts being developed by the European Commission is expected to tighten the rules on how future profits should be determined by insurers when looking to use them to take credit for DTA.
DTA are accumulated when an insurer expects to pay less tax in future because of a taxable temporary difference between the recognition and measurement of items in its economic or Solvency II balance sheet and their local tax basis. Solvency II will permit insurers to recognise DTA as capable of absorbing losses provided they can project future taxable profits.
In the latest draft of Solvency II's level 2 delegated acts, the Commission has hardened its approach to how these future taxable profits should be projected, according to Insurance Europe, the industry trade federation. Insurers will have to show that future profits will be available, while earlier drafts had said that it must only be probable that they will be available.
A spokesperson for Insurance Europe says: "We already had concerns about the burden of proof required to show it was probable that future taxable profit would be available. Now this has worsened, since the potential increase in DTA shall not be utilised unless undertakings are able to demonstrate that future profits will be available. We believe this requirement should be softened to allow undertakings to be able to make use of this adjustment more easily." A European Commission spokesperson said the wording of the delegated acts would not be relaxed, and that it considered the change to be a "clarification of a requirement that was implicit in previous versions of the draft delegated acts".
European guidance on the degree of granularity required by firms when projecting these future profits has been lacking, resulting in some national regulators taking matters into their own hands.
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