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HMRC internal manual

General Insurance Manual

Captive insurers: mortgage indemnity business

Domestic mortgage indemnity business (also referred to as mortgage insurance guarantee or ‘MIG’ business) is unusual in general insurance terms, as it is not annual. For a single initial premium cover is provided for default of repayments over the whole of an agreed mortgage term. See also GIM6070.

Mortgage indemnity business may in principle be accounted for on either an annual or a funded basis (but under the ABI 2005 SORP, now under UK accounting on annual basis only). Initial premiums are generally spread in the accounts over a ten-year period or so, closely following the expected pattern of default in order to match income with claims.

In the early 1990s cases of mortgage default and negative equity increased and insurance companies suffered huge losses in this type of business. As a result, insurance premiums rose sharply, and some insurers pulled out of the market altogether. Many lenders set up captive insurance companies to handle mortgage indemnity insurance. The conversion of many building societies to banks was also a factor. Banking regulations make it easier to set up captives, but building society rules were also eased. Initially these companies normally used funded accounting which spreads beyond the two to four year basis acceptable under the UK funded accounting procedures. However, the rules on the submission of returns and payment of dividends by captives using funded accounting (GIM11100) effectively limit the captive’s funded accounting to a maximum of four years.

Some MIG captives have used annual accounting to circumvent these provisions. Premium recognition in the captive’s accounts, and hence deferral of an acceptable distribution of the dividend to the UK company, may be deferred for around five years. Transfer pricing arguments may be used to challenge the amount of premiums payable by the UK mortgage lender to the captive, particularly where there are other devices present to avoid the CFC charge. There is less need to mount such a challenge where the payment of the premium by the UK group company matches the recognition of the receipt in the captive. Some mortgage lenders have now ceased to use MIG captives.