FATCA impact on insurance industry

June 2012

Introduction The draft FATCA regulations released on 8 February 2012 incorporate some of the changes and exclusions that the insurance industry has been lobbying to include. However, it is apparent the exclusions and reliefs do not go as far as many were hoping.

Although there are now exclusions for life protection business, as well as some pension and other tax efficient savings products, insurers will need to consider individual product terms and conditions in detail to determine whether they meet the relevant conditions for exclusion.

Coinciding with the draft regulations release, a joint statement was issued by the UK, US, France, Germany, Spain and Italy on information sharing between these jurisdictions.

It seems this may lead the way to simplified reporting requirements for entities in these jurisdictions. However, it also opens the door for a multi-territory FATCA regime with reciprocity on information sharing, as between the EU territories covered.

Industry impact Highlighted below are the key points for the insurance sector arising from these recent releases:

• Only “cash value” insurance contractsand annuity contracts are within thescope of FATCA. Companies shouldconsider whether their products havea “cash value”, as specifically definedin the draft regulations, as there maywell be “boundary" issues.

• There are exclusions intended toexempt "risk products" and a specificexclusion for “term life insurancecontracts” which is intended to takeout life protection products. Overall,the insurance savings business will besquarely caught by FATCA unlesscertain specific exclusions apply.

• The industry has lobbied hard forexclusions for regulated localretirement savings products. The draftregulations do exclude certain groupand individual “retirement and pensionaccounts”; however there are eligibilityconditions. Individual retirementproducts in jurisdictions whereindividuals may contribute more than50,000 $ a year to personal (ratherthan group products) will remain withinscope of FATCA; other FATCA criteriamay also be more onerous than localrequirements.

• Both entity and individual pre-existinginsurance accounts with an aggregatebalance of less than 250,000 $ areexcluded from the identification anddocumentation requirement (there is a50,000 $ de minimis for individuallyheld non-insurance accounts, so thisis clearly an insurance-specificrelaxation).

Exemptions The carve-outs for insurers provided in the draft regulations are not as broad as hoped for:

• Exemption for general insurance andlife protection products

• Not all regulated retirement savingsproducts will be exempt

• Pre-existing insurance policies below250,000 $ are outside of scope of thedocumentation review

• Limited other exclusions

There are exclusions for “deemed compliant” FFIs, however these do not appear broad enough to be of significant use to the majority of insurance companies.

Pension management companies may be classified as NFFEs – if all their pension scheme customers fall within one of the financial account exemptions.

There is an exclusion from withholding, including passthru withholding, for certain “grandfathered obligations” which will cover some insurance policies in effect on 1 January 2013.

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Regulations effects More reliance can be placed on existing customer take-on procedures for documentation of new policies. However insurers will still need to consider the systems impact of the required review of all information collected.

Insurers will still need to consider backbook remediation, however the increased 250,000 $ threshold may make this less onerous.

Certain areas of the draft regulations still do not translate well for insurers:

• FFI agreements

• Policy valuation

• Foreign passthru payments

Insurers will need to ensure that where the customer relationship and information is obtained, held or managed by a third party, that they have sufficient information from and assurance over those third party processes to ensure their own FATCA compliance (e.g., third party insurance agents).

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ContactPascal EberPartner - Operations Excellence & Infrastructure Operations+352 45145 2649+352 62132 6819peber@deloitte.lu

Basil SommerfeldPartner – Operations & Human Capital Leader+352 45145 2646+352 62149 6065bsommerfeld@deloitte.lu

Alain VerbekenDirector - Tax - International Tax-GFSI+352 45145 2513+352 62150 6508alverbeken@deloitte.lu

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