Loss-absorbing capacity of deferred taxes (LAC DT)

A French insurer subject to corporate tax at 25% loses 400 million in the scenario used to compute its SCR. It does not lose 400: its tax charge falls by 100, and the net blow is 300. The loss-absorbing capacity of deferred taxes adjustment, written Adj_DT, puts this into the formula: SCR = basic SCR + operational risk + adjustments, with the DT adjustment deducted. Article 207 of Delegated Regulation (EU) 2015/35 frames it. The economic balance sheet already carries deferred tax liabilities, which absorb up to their amount with no condition; beyond that, deferred tax assets are needed, so the insurer has to show that taxable profits will exist after the shock, over a bounded period. The supervisor reads that demonstration closely. It rests on the business plan, on the loss carry-back capacity of the jurisdiction, and on the coherence between the shock scenario and the announced profits: an insurer that has just lost 400 does not post the same profits afterwards. Groups that depend on this adjustment say so in plain terms in their reports. It is a sensitive item in the ratio, since it can be worth several tens of points, and a tax reform or a doubt about profitability makes it vanish.