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Insurers await tax reform

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Insurers await tax reform

Details, details — insurance industry analysts are still waiting on the details of President Donald Trump’s proposed tax reforms.

What we know is that the Trump plan, released late last month, would reduce the number of tax brackets for individuals from seven to three: 10%, 25% and 35%, lowering the top rate by nearly 5 percentage points.

The plan would also cut the top federal capital gains rate from 23.8% to 20% by eliminating a 3.8% tax used to fund the Affordable Care Act. In addition, the plan would eliminate the Inheritance Tax and lower the corporate tax rate from 35% to 15%.

While talk of a reduction in corporate tax rates is being generally applauded by insurance industry analysts, the strong protectionist message on numerous issues coming out of the White House has been cause for concern in some areas of the industry.

House Republicans have their own ideas, outlined in their Tax Reform Task Force Blueprint released last June, that propose cutting the corporate rate to 20% and the implementation of border adjustment taxes, wherein a tax is rebated when a product is exported to a foreign country and is imposed when a product is imported from one.

Robert Gordon, Washington-based senior vice president of policy development and research for the Property Casualty Insurers Association of America, said U.S. insurers buy much of their reinsurance from foreign reinsurers.

“If the border adjustment tax is applied to foreign reinsurance,” Mr. Gordon said, “then that makes foreign reinsurance a lot less attractive and shifts more reinsurance capital back into the U.S. It could potentially raise the rates for reinsurance and reduce the attractiveness of reinsurance overall, and reinsurance helps spread risk around global markets.”

“There’s been campaign talk and other media buzz,” said Jim Auden, Chicago-based managing director at Fitch Ratings Inc. “Generally, if corporate taxes are lower and more competitive with the rest of the world, that’s probably a good thing overall for insurers.” 

Michael Beaty, tax partner at Ernst & Young L.L.P. in Boston, said that while a 15% corporate income tax rate would be welcomed by many insurers, “the devil will be in the details.”

“Trump’s plan was devoid of details,” Mr. Beaty said in an email. “To the extent congressional Republican leaders push to make tax reform and the associated tax cuts permanent, they will need to find a way to pay for the rate cuts. That will create winners and losers and the insurance industry may not end up on the winning side.”
 
Mr. Beaty said foreign-owned insurers are concerned about the House Republican border adjustment tax and whether it will apply to outbound reinsurance transactions, and if so, how that could impact their business models if enacted into law. In contrast, some U.S.-owned insurers view the border adjustment tax favorably and believe it could have a positive impact on their business models.
 
“President Trump’s tax plan did not mention the border adjustment tax,” he said. “But, that does not mean the border adjustment tax proposal is dead. In fact, House Republican leaders are currently working to modify the transition rules of the border adjustment tax in an effort to soften disruptions.”

If tax reform is passed, it could have a significant effect outside the U.S. insurance market, particularly in Bermuda.

Over the past 30 years, many insurers and reinsurers established operations in Bermuda, where there are no taxes on profit, income, dividends or capital gains.

The domicile has proved particularly attractive to catastrophe reinsurers and excess liability insurers, which can operate with relatively small staffs compared with other insurers and reinsurers. Many of the insurers and reinsurers in Bermuda offer coverage for U.S.-based risks.

In a February report, “The Bermuda Triangle: The New U.S. Administration, Taxes, and Reinsurance,” S&P Global Ratings said that “the prospect of lower corporate tax rates, a border adjustment tax, and a lighter-touch regulatory regime in the U.S. could erode the relative attractiveness of Bermuda as a jurisdiction, and the competitive advantage enjoyed by Bermuda (reinsurers and insurers).”

The report said that while it is too early to tell what the final rules will be or how they will apply to Bermuda insurers, “we believe a lower corporate tax rate as part of a broader overhaul of the U.S. tax code has a higher likelihood of materializing than a border adjustment tax.”

But Bermuda holds other benefits for insurers and reinsurers, said Bob Richards, Bermuda’s deputy premier and minister of finance, during an interview at the Risk & Insurance Management Society Inc. conference in Philadelphia last month.

“There are other places in the world where there’s no tax on insurance and they don’t have what we have in Bermuda,” he said.

The combination of Bermuda’s regulatory environment, the expertise in the market and the Bermuda government’s support of the industry, through speedy legislative changes, are also important elements that companies consider when establishing operations in the domicile, Mr. Richards said.

“Tax is an important element but it’s not the only element,” he said.

Robert Hoyt, the department head and Dudley L. Moore Jr. chair and professor of risk management and insurance in the Terry College of Business at the University of Georgia in Athens, said while lower taxes might make the U.S. a somewhat more attractive domicile for insurers, Bermuda has other advantages, including technical insurance expertise within the Bermuda market.

In addition, the regulatory constraints within the U.S. may “make it attractive for certain aspects of the business to be located in other domiciles that might have a more flexible regulatory environment,” he said.

Gavin Souter contributed to this report.

 

 

 

 

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