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LAM15310 | Excess expenses, losses and deficits: Loss restriction: switching off the loss restriction when there is a shock loss: Has there been a shock loss? CTA10/269ZM

From HM Revenue & Customs · Life Assurance Manual

A 'shock loss' is a loss that meets the conditions in CTA10/269ZM and is claimed as a shock loss under the provisions of CTA10/S269ZK(1).

Shock losses can be carried forward and set off against profits arising from the same source in full without the application of the loss restriction rules (LAM15200). See LAM15360 for more details on the use of shock losses.

CTA10/S269ZM contains a test to see whether a 'solvency shock period' has arisen. This works by looking across a 12-month period and seeing whether for that period the insurance company has a solvency loss which is greater than its shock loss threshold.

The threshold will be passed where the reduction in the insurance companies basic own funds (BOF) exceeds 90% of its solvency capital requirements. The threshold is set at 90% of the SCR to allow for complexity within the SCR calculation and aims to ensure inclusion of all scenarios modelled that are close to the most extreme 1 in 200 event. HMT has the power to make regulations (CTA10/269ZQ(1)) to amend these provisions.

BOF are determined in accordance with the Solvency II Directive and are broadly speaking the excess of a company’s assets over its liabilities. The relevant year end numbers are disclosed in the company’s Solvency and Financial Condition Report. The 1-in-200 scenario numbers are calculated by the company and the calculations used for the purposes of a claim under CTA10/269ZL are reported on by the chief actuary or a person with equivalent functions.

These amounts are calculated differently depending on whether the insurer has 'relevant ring-fenced funds' (relevant RFF) or not. Relevant RFF are Ring Fenced Funds (RFF) as defined under Solvency II regulations which are also with-profits funds (CTA10/S269ZP). The calculations are explained in LAM15320 where there are no relevant RFFs and in LAM15330 where the insurer has relevant RFFs.

There may be more than one solvency shock period but these must not overlap. The 12-month period for determining the loss, known as the solvency shock period, need not be the accounting period in which the tax loss arises but both periods must have at least one day in common. If there is a loss for an accounting period and that accounting period falls completely within a solvency shock period then that loss is a shock loss. The shock loss must be carried forward, or be capable of being carried forward, to a subsequent accounting period.

Where the test in CTA10/S269ZM is met and a solvency shock period arises the company can make a claim under section 269ZK for losses that arise in an accounting period to be determined as shock losses. For further guidance on the rules for making claims (section 269ZK and section 269ZL) see LAM15350.

If the accounting period in which a loss arises does not fall completely within the solvency shock period, it will be necessary to apportion the loss of one or more accounting periods to determine the shock loss (see LAM15340).