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EY 28: Shareholder base other profit: profit participation policies that are existing business
or “Calculating profit for certain older life insurance policies”
You could also call this:

“Calculating profit for new profit participation policies in life insurance”

This section explains how life insurers calculate an amount for profit participation policies that are new business. Here’s what you need to know:

You calculate this amount using a special formula. The formula takes into account other profit, a percentage called ‘gate’, and any negative amount from the previous year.

The ‘other profit’ part of the formula is worked out using another calculation. This calculation looks at the difference between actual and estimated premiums, claims, and closing liabilities for the year.

If the result of the main formula is positive, you include it as income in the life insurer’s shareholder base income. If it’s negative, you don’t include it as a deduction, but you carry it forward to use in next year’s calculation.

The section also explains how to calculate policy liabilities and what counts as ‘new business’. It’s important to use the same assumptions when working out different parts of the calculations.

Remember, this only applies to profit participation policies that are considered new business, not existing business as defined in section EY 28.

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Next up: EY 30: Transitional adjustments: life risk

or “Rules for taxing older life insurance policies during transition period”
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Part E Timing and quantifying rules
Life insurance rules: Shareholder base other profit: profit participation policies

EY 29Shareholder base other profit: profit participation policies that are new business

  1. For an income year, a life insurer has an amount, for profit participation policies that are new business, that is calculated using the formula—

    (other profit × gate ÷ (1 + gate)) − previous negative amount.

    Where:

    • In the formula in subsection (1),—

    • other profit is the amount calculated for the income year under subsections (5) to (9):
      1. gate is the proportion of a policyholder's share of profits from the asset base that is used in the formula that calculates a transfer to the benefit of the life insurer's shareholders from the profits of the asset base, as described in paragraph (a)(iii) of the definition of profit participation policy:
        1. previous negative amount is the amount from the previous year described in subsections (3) and (4).

          1. If, for an income year, the formula in subsection (1) calculates a positive amount, that amount is included as income in the life insurer’s shareholder base income. If it is a negative amount, then that amount is not included as a deduction in the life insurer’s shareholder base allowable deductions, but see subsection (4).

          2. The amount by which the amount calculated using the formula in subsection (1) is less than zero is carried forward to the next income year, to be used under this section in the formula as the item previous negative amount in that next year.

          3. For the purposes of the item other profit in subsection (2), an amount is calculated, for the income year (the current year) for profit participation policies that are new business, using the following formula:

            (premiums − premiums estimate) − (claims − claims estimate)− (closing liabilities − estimated closing liabilities).

            Where:

            • In the formula in subsection (5),—

            • premiums is the amount of premiums for policies for the current year, but subtracting relevant life reinsurance premiums:
              1. premiums estimate is the amount of valuation premiums that the life insurer expected, using best estimate assumptions, to receive in the current year for policies that are in force at the start of the current year, or are first entered into in the current year, after subtracting the value, net of tax and used in the life insurer’s financial accounts, of relevant life reinsurance premiums for the current year:
                1. claims is the amount of claims for the current year, after subtracting relevant life reinsurance claims:
                  1. claims estimate is the actuarially determined amount of claims that the life insurer expected, using best estimate assumptions, to receive in the current year for policies that are in force at the start of the current year, or are first entered into in the current year, ignoring surrenders and after subtracting the value, net of tax and used in the life insurer’s financial accounts, of relevant life reinsurance claims for the current year:
                    1. closing liabilities is the total amount, determined as at the end of the current year for policies that are in force at the end of the current year, of the policy liabilities including benefits that vest by the end of the current year:
                      1. estimated closing liabilities is the total amount, estimated as at the beginning of the current year for policies that are in force at the start of the current year and expected to be in force at the end of the current year, of the policy liabilities including benefits that vest by the end of the current year.

                        1. In this section, valuation premiums means the amount of premiums payable for a policy, actuarially determined by reference to the premium formula used when the policy was first entered into, or, if the premium formula is unavailable, by reference to mortality, expense, and other assumptions applicable to premiums for similar policies at the beginning of the income year in which the policy was first entered into. The valuation premiums must not include any allowance for future bonus declarations or future shareholder profits. The amount of the valuation premium for a policy must not change, unless significant changes to the policy justify changing the valuation premium.

                        2. For the purposes of subsection (6), the policy liability for a policy is an amount that is actuarially determined for the policy using best estimate assumptions and that—

                        3. is the greater of the current surrender value of the policy and the amount that is the total amount of future mortality and maturity claims, future expenditure or loss, and future tax payments, reduced by the amount of future valuation premiums; and
                          1. is obtained using present values that are net of tax and used in the life insurer’s financial accounts and allowing for relevant life reinsurance premiums and relevant life reinsurance claims; and
                            1. does not include bonus declarations that vest after the current year; and
                              1. does not include an allowance for surrenders or the payment of surrender values.

                                1. The same best estimate assumptions must be used for actuarially determining amounts under subsections (6), (7), and (8). The assumptions may be appropriate for the start of the year, or for the end of the year, but once the choice is made between start of the year and end of the year, the assumptions must not be changed.

                                2. For the purposes of this section, new business means, for a policy, that it is not existing business under section EY 28.

                                Notes
                                • Section EY 29: substituted, on , by section 190(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                • Section EY 29(5) formula: amended, on (applying for income years beginning on or after this date), by section 90(1)(a) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                • Section EY 29(5) formula: amended, on (applying for income years beginning on or after this date), by section 90(1)(b) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                • Section EY 29(6)(b): amended, on , by section 90(2) (and see section 90(9) and (10)) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                • Section EY 29(6)(d): amended, on , by section 90(3) (and see section 90(9) and (10)) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                • Section EY 29(6)(e): replaced, on (applying for income years beginning on or after this date), by section 90(4) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                • Section EY 29(6)(f): replaced, on (applying for income years beginning on or after this date), by section 90(5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                • Section EY 29(8) heading: replaced, on (applying for income years beginning on or after this date), by section 90(6) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                • Section EY 29(8): replaced, on (applying for income years beginning on or after this date), by section 90(6) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                • Section EY 29(9): amended, on (applying for income years beginning on or after this date), by section 90(7) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                • Section EY 29 list of defined terms present value (net): repealed, on , by section 90(8) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).