George Osborne's announcement on Wednesday set out at least two areas of potential impact for the insurance industry.

The first concerns insurance linked securities (ILS). To date most ILS activity has taken place offshore, which George Osborne now seeks to change. What does this mean in practice? A number of ILS funds are already listed in the UK. The key is now to encourage them to undertake their substantive activity in the UK – i.e. to establish their entities (otherwise known as insurance special purpose vehicles) in the UK, and likewise to retain in the UK the proceeds of the notes that these ISPVs issue to the capital markets. So what can the government do? Broadly speaking it can consider Improving (i) the relevant regulatory regime; and (ii) the tax treatment of such arrangements.

Changes are already underway for the former, as a result of Solvency II which will be implemented across the EU from 1 January 2016. The PRA's current rules for ISPVs will be replaced in their entirety by the Solvency II ISPV rules. What does this mean? The PRA's current rules - which to date have hardly ever been used given the unpopularity of setting up an ISPV in the UK - are in fact quite light touch. These rely on a clever device whereby a cedant may only take credit for risk ceded to an ISPV if it obtains a PRA waiver, which the PRA will provide only if its case-specific requirements are met. This will be replaced on 1 January 2016 with a highly prescriptive and detailed set of requirements which are both mandatory and "maximum-harmonising".  So the government will not have much flexibility here – its hands are effectively tied. This shifts the onus onto the tax treatment of ILS arrangements, and we will watch this space with interest.

The second was the confirmation that the Diverted Profit Tax (DPT), announced in the December 2014 Autumn Statement, will be enacted with effect from 1 April 2015. Dubbed the "Google Tax", the draft DPT legislation is widely cast and could apply to a large UK insurance group which transacts with an associated offshore company which pays little or no tax. We will need to see how the legislation looks when the Finance Bill comes out next week, as there has been a lot of lobbying in the past two months. In addition HMRC has not yet published its guidance on how it will interpret and operate the legislation in practice.

The legislation is complex but as currently drafted in essence it will only apply where the offshore entity and/or the transaction lack economic substance. This will look at the financial benefit of the tax reduction or the contribution of the economic value.

As a broad matter it may be that the DPT will not apply in practice to insurance/reinsurance arrangements provided the sums paid are arms' length and the offshore entity has sufficient substance in terms of resources and personnel.

Last year a different anti-avoidance provision was enacted – see link - dealing with the transfer of corporate profits. HMRC guidance on this did include material on intra-group reinsurance to the effect that this would not normally be caught, and the rule would only apply if the normal commercial motives for reinsuring were absent.  See our earlier blog on this for further detail.

We will need to see if the revised legislation, and the guidance once published, contain any particular safe harbours for the insurance sector.