Dutch insurers lead the way in LAC DT substantiation

Within Solvency II, LAC DT plays an important role in insurers’ capital management. LAC DT reduces the Solvency Capital Requirement (SCR) because future tax benefits may be recognized in the SCR calculation. Across the markets included in the study, this reduction represents on average between 8 and 18 percent of the gross SCR. 

Four determining factors 

The benchmark compares LAC DT practices among large insurers in the Netherlands, Belgium, Germany, Luxembourg, France and Italy, based on publicly available SFCR disclosures for the years 2022 through 2024. In addition, PwC assessed how local tax rules, supervisory expectations, governance and international operating structures influence differences between countries. 

The study identifies four factors that determine the extent to which insurers are able to utilize LAC DT: 

• the maturity of modelling and governance;  
• supervisory expectations;  
• national tax rules; 
• the complexity of cross-border branch structures.  

LAC DT remains a key capital management metric 

The benchmark shows that the Netherlands and Italy achieve relatively high levels of LAC DT substantiation. Dutch insurers utilize on average 66 percent of their maximum LAC DT capacity, while Italy reaches 74 percent. Germany, France, Belgium and Luxembourg lag behind. 

These differences are driven not only by modelling practices, but also by national tax systems, levels of LAC TP available and the way supervisors approach LAC DT. 

Dutch insurers face a more challenging starting position 

An important difference compared to other countries lies in the Dutch tax regime. In 2022-2024 Dutch life insurers hold Deferred Tax Assets (DTAs) on their balance sheets. As a result, they are less able to rely on embedded tax capacity than insurers in countries such as Germany and Italy, where Deferred Tax Liabilities (DTLs) are more common. 

This distinction is important. Insurers with a net DTL position already have embedded tax capacity available to substantiate LAC DT. Dutch insurers, by contrast, rely much more heavily on projected future taxable profits and detailed evidence requirements. 

This is one of the reasons why Dutch insurers have invested significantly in modelling, governance and documentation over recent years. At many Dutch large insurers, LAC DT is fully embedded in their capital management strategy, quarterly reporting cycles and second-line review processes. 

Stricter supervision raises the bar

The benchmark also shows that stricter supervision does not automatically result in lower LAC DT recognition. On the contrary: markets with intensive supervisory scrutiny often have more advanced LAC DT models.

Over recent years, DNB has published extensive guidance on deferred taxes and LAC DT. The supervisor focuses strongly on the quality of future profit projections, prudency in assumptions and the substantiation of management actions. DNB also requires explicit haircuts on future profit sources to reflect post-shock uncertainty.

This increases the evidentiary burden for insurers, while at the same time stimulating the development of mature governance and modelling frameworks.

The study also highlights a tension within the market. Insurers invest heavily to comply with current expectations, while supervisory frameworks and guidance continue to evolve. This creates uncertainty regarding the sustainability of existing methodologies and assumptions.

Looking beyond percentages

An important conclusion from the benchmark is that insurers should not compare their LAC DT position based on percentages alone.

A relatively high LAC DT ratio in a jurisdiction with large net DTL positions often requires less complex substantiation than a comparable ratio in the Netherlands. As a result, the quality of modelling, assumptions and governance often says more than the final percentage itself.

The study also shows that cross-border branch structures make LAC DT substantiation more complex. Insurers operating through European branches must allocate Solvency II shocks across multiple tax jurisdictions. This requires additional modelling and tax analysis.

Continued investment in modelling remains important

The benchmark further shows that investment in mature LAC DT models remains important, including for insurers that currently benefit from significant DTL positions. Changes in markets, regulation or portfolios can quickly affect available tax capacity.

Robust modelling helps insurers identify alternative profit sources and improve the stability of their solvency position. This is becoming increasingly important as supervisors place greater emphasis on evidence, governance and consistency of assumptions.

We help insurers strengthen their LAC DT governance and modelling so they can better steer their capital position and manage supervisory challenges.