Last 05 July 2021, ANIA (Italian National Association of Insurance Companies), published the Circular 0222, dealing with the definition of Unit Linked (UL) policies in relation to a judgement passed by the Regional Tax Commission in favour of the insurance company and against the Italian tax authority (Agenzia delle Entrate): the UL status as insurance product cannot be questioned, regardless of the presence of any guaranteed benefit at maturity. This verdict shall protect insurance companies from further litigations.
On a similar note, a judgment was delivered by the civil courthouse of Rome last 28th May 2021: a 1% death benefit guarantee is sufficient to qualify the UL policy as an insurance product.
The definition of the status of a UL policy as a financial or as an insurance product has relevant consequences for both the policyholder and the insurance company.
From the policy holder point of view, it impacts the taxation rule: indeed, while the capital gains of financial investment products are subject to running taxation (year-by-year), insurance products capital gains are taxed at redemption only (either full or partial).
As well, the status of a UL policy matters a lot for the insurance company too, under both the IAS/IFRS and SII Balance Sheet
albeit under the current framework the difference in a UL status (insurance or investment) is just translated by the different accounting standard (IFRS4 or IAS39) it falls under into a mere different exhibit of similar quantities (insurance, IFRS4: liabilities and claims as costs, premiums and unwinding of reserves as revenues; investment, IAS39: premiums as debt and margins as revenues), under the forthcoming IFRS17 and IFRS9 principles the difference will be of substance: insurance products will follow IFRS17 and will benefit from a smoother distribution of profit, thanks to the lower volatility achievable under the Variable Fee Approach (VFA) mechanism and the Contractual Service Margin (CSM) release
UL products are generally profitable, showing a positive PVFP (in a leakage free environment, A=L+PVFP, with A equal to the Mathematical Reserve and L equal to the BEL value defining the contract): the higher the premiums, the higher the margins. Under the SII framework, recurrent premiums and top ups can be considered for the Cash Flows (CFs) projection just if they belong to the contract, falling within its boundaries. This happens when a financial (such as a minimum guarantee) or a biometric (such as a death benefit guarantee) guarantee is provided. It is common practice to consider a UL as an insurance product when it offers a death benefit guarantee above the unit value up to the level of premiums paid or with an increase by a certain threshold (1%, 5% or 10%). EIOPA (at that time, the CEIOPS) provided an indication of the threshold to be adopted in the document “Annexes to the Technical Specification for Preparatory Phase, Part I”, stating at p.16 “Benefits: Whole life unit-linked policy paying certain amount above of the unit value (e.g. 10,000 euros or 1%) on the death of the policyholder; no fixed guarantee of benefits. Contract Boundary: The cover provides a discernible financial advantage to the beneficiary, and therefore future premiums would generally belong to the contract.”
Let us go back to the judgement passed by the Regional Tax Commission in favour of the insurance company and against the Italian tax authority.
In its complaint, the tax authority asserted that, to be classified as insurance products, the policies should have these features:
- a guaranteed minimum payout at maturity, independent of the performance of financial markets
- a demographic (life) risk undertaken by the insurance company
- the possibility for the policyholder to pay recurrent premiums in place of a single premium.
To support its claim, the Italian tax authority quoted the judgment 6319/2019 passed by the Italian highest court (Corte di Cassazione), where the court denied the insurance nature of a contract in which the insurer undertook a negligible level of demographic risk.
In its rejection of the Italian tax authority claim, the Regional Tax Commission provided a detailed outline of the current national and European regulations on Unit Linked policies, reaffirming that their status as insurance products cannot be questioned, regardless of the presence of any guaranteed benefit at maturity. The Commission mentioned the following regulatory sources:
- the Italian code of private insurance, stipulating that all contracts underwritten by an insurance company are insurance products, including those whose benefits are directly linked to the financial performance of investment funds, internal funds, or other financial indexes
- the European Directive 2016/97, holding a view very similar to the one just mentioned
- the European justice court, with its judgments dated 1st March 2012 for the claim C‐166/11 and 31st May 2018 for the claim C‐542/16.
Finally, the Regional Tax Commission outlined the characteristics that a UL product may possess without altering its status as an insurance policy:
- no guarantees on the final benefit, being it dependent on the performance of the financial instruments where the policy invests
- recurring premiums may vary during the lifetime of the contract
- the policy may or may not not incorporate a demographic risk for the underwriter.
On a similar note, another important judgment was delivered by the civil courthouse of Rome last 28th May 2021. The petitioners, a man and his son, lost 5 million euros into a UL policy that invested in funds involved in a stock crash (the ValorLife scandal in Liechtenstein). The plaintiffs argued that the 1% death benefit guarantee provided by the contract was insufficient to qualify the policy as an insurance product, that should have rather been classified as a financial product and, thus, should have been nullified as a case of mis selling. The XVI section of the Rome courthouse rejected their claim, confirming the insurance status of the UL and the loss of the policyholders.
Circolare Ania, Prot. 0222
Sentenza della Commissione tributaria regionale della Lombardia, sez. 14, dep. 17 maggio 2021, n. 1864