Question

What is the impact of the united states tax code on the amount of capital held by insurers?

Answer 1

Significant changes have been made to Life and Property and casualty (P&C) insurance companies under The United States Tax code. The US insurance companies will benefit from the change of the corporate tax rate to 21 %, but some provisions would impact the profitability of NON-US parented insurance companies(with U.S. insurance operations) making the United States a less attractive destination in which they would want to operate. This may potentially lead to decreased competition and an increase in premiums.

Major reforms with respect to Insurance Companies:

For life insurers:

• The small life insurance company deduction that shield a portion of income from taxation insurers below $500 million in assets is repealed

• Insurance reserves for any Life Insurance agreement to be determined as the greater of the net surrender value, or 92.81 percent of the amount determined using the tax reserve method.

• Investment income is set at 30% for the policyholders, and company’s share is set at 70%. This was a complex calculation earlier.

• Capitalization rates on policy acquisition costs are increased by approximately 20%. The amortization period for these expenses is extended from 120 months to 180 months.

• Changes in methods of measuring reserves will be amortized over a time frame consistent with other general changes in accounting methods instead of 10 years

• Remaining Policyholder Surplus Account deferred tax is accelerated and payable in 8 annual installments.

For P&C insurers:

• The company’s share of tax-exempt investment income declines from 85% to 75%

• A number of changes are made to the computation of tax reserves that are likely to increase taxable income, including:
  • Using the corporate bond yield curve instead of historical industry payment patterns
  • Extension of loss payment pattern computations
  • Repealing the election to use company-specific, rather than industry-wide, historical loss payment patterns