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Reasons for the significant growth in tax insurance

In the UK, Marsh saw the number of tax insurance policies incepted double in 2021, compared to the prior year. Our latest tax bulletin explores some of the reasons behind this growth.

According to Marsh research, demand for tax insurance is growing in popularity on a global basis, and the picture is no different in the UK and Continental Europe.

In the UK, Marsh saw the number of tax insurance policies incepted double in 2021, compared to the prior year.  Several of these policies had insurance limits of well over US$100 million, and record year-on-year gross written premium (GWP) growth was achieved.

The question is, why is there such a growing interest in insuring tax risks?  This bulletin will explore some of the reasons behind the growth of tax insurance.

1. Expansion of tax insurance risk appetite     

Over the past several years, the vast majority of tax insurers have deepened their expertise by recruiting dedicated, senior tax specialists to underwrite tax risks. These individuals have built up an impressive global network of tax advisors.  This has given rise to increased confidence within insurers to underwrite various types of tax risks, spanning multiple jurisdictions — even where such tax issues may be the subject of ongoing disputes with the tax authority or under audit.

This expansion of appetite for tax risks has greatly enhanced the pool of insurable tax risks and contributed to growth.

2. Competitive pricing     

Until recently, there were only a handful of serious tax insurers in the European market.  Now, there are over 10 tax insurers, some of which having extensive capacity.  The increased competition among insurers has driven pricing down significantly, and it is not unusual to see tax risks being insured for well below a 2% premium rate (and in some extreme circumstances, below 1%); this was previously inconceivable.

This competitive pricing for the same and even increased cover, has made the product much more attractive.

3. Lack of seller indemnities

Increasingly, sellers (in particular private equity sellers) are not prepared to provide indemnities for tax risks relating to the target entities being sold. Tax insurance is now a real solution on the table for buyers that cannot rely on seller indemnities. The increased culture of sellers refusing to provide meaningful indemnities coincides with a significant increase in buyers turning to tax insurance as an alternative.

4. Assertive tax authorities

After the financial crisis of 2008 and the 2020 COVID-19 pandemic, governments have large fiscal holes to fill — and one instrument in their arsenal is taxation.  The result is that tax authorities globally have become much more aggressive and assertive in their approach to taxation, and tax insurance is increasingly being recognised by taxpayers as a tool to effectively manage their tax risks.[1]

Conclusion

Tax insurance has experienced tremendous growth, and going into 2022, we see nothing to suggest this growth is abating.  As taxpayers become increasingly aware of their tax risk, we believe Marsh is well-placed with its dedicated global team of tax insurance specialists to assist clients in accessing the opportunities presented by tax insurance.

[1] https://www.oecd.org/coronavirus/policy-responses/tax-and-fiscal-policies-after-the-covid-19-crisis-5a8f24c3/

Meet the authors

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Leon Steenkamp

Head of Tax Insurance

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Stefan Farahani

Head of Specific Risks