Even if negotiators manage to avoid a plunge over the fiscal cliff, the next stage in budget negotiations could spell headaches for the property/casualty insurance industry, according to observers.

That's not to say that the fiscal cliff itself isn't a cause for concern for the industry, particularly for agents and brokers. Reverting to old, higher tax rates could have a significant impact on the way producers operate. But the unknown nature of potential tax reform in the next Congress could have a significant impact on the industry as well, say observers.

“Insurers aren't only going to be affected by the taxes, but the uncertainty created by that cliff further exacerbates the financials of anybody participating in this market,” said Leigh Ann Pusey, president and CEO of the American Insurance Association in Washington.

“Our industry needs this economy growing at a stronger pace than it is, and we must avoid at all costs going over the fiscal cliff,” Ms. Pusey said.

Most of the concerns that brokers have are the same as those of the broader business community, said Joel Wood, senior vice president of government affairs with the Council of Insurance Agents & Brokers in Washington. But for brokers, a fall over the fiscal cliff could have implications for merger and acquisition activity even before the fall happens, he said.

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“If the capital gains rate goes up next year, the value of firms being sold goes down,” Mr. Wood said.

“I don't think this necessarily means a flood of M&A activity at the end of the year,” he said, adding that M&A activity is going on now. “I think if the rates do rise, there may be something of a stall for some M&A activity for a time.”

“We look at the fiscal cliff from a small business perspective,” said Ryan Young, senior director of federal affairs for the Alexandria, Va.-based Independent Insurance Agents & Brokers of America. “Two-thirds of our members are organized as pass-through entities and pay taxes at the individual rate. Obviously, allowing the rates to expire would increase taxes on all of our small-business membership.”

Mr. Young said the members are concerned about allowing the estate tax to revert to the old, higher rates. “Our main worry is that you're going to see a lot of family businesses unable to pass down the business to the next generation because they would have to liquidate the business to pay the taxes,” he said.

Insurers as well as producers are concerned about the cliff, although for different reasons, experts say.

“It's part of a broader concern about the economic condition of the country,” said Howard Mills, director and chief adviser at the insurance industry group at Deloitte & Touche USA L.L.P. in New York. He called the cliff “an acute challenge.”

“The fiscal cliff is a significant issue for property/casualty insurers,” in terms of taxes and the economy as a whole, said Karen Wells, co-head of insurance advisory services for Towers Watson & Co. in New York.

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For property/casualty insurers, “capital gains tax is an important consideration. However, many of them do tend to hold securities for the lifetime of the investment,” Ms. Wells said. “Another consideration is, with a potential increase in corporate capital gains taxes, the U.S. runs the risk of pushing more insurance companies to consider offshore domiciles.”

Of particular concern is what Congress might do if there's a failure to reach an agreement, Mr. Mills said. He said Congress could consider changes to the industry's tax treatment, and that insurers worry “that a well-capitalized property/casualty industry might be seen as a source of revenue.”

“Our fear is less based on the fact that we're insurance companies and more on the impact it could have on the overall economy,” said Jim Grande, senior vice president in the Washington office of the National Association of Mutual Insurance Cos. The combination of tax hikes and spending cuts would “push us back into recession,” he said.

But for the insurance industry, “some of the bigger concerns will come in the phase that follows the fiscal cliff, which is major tax reform,” said Mr. Grande. He said there seems to be agreement that efforts will be made to broaden the tax base, and “that essentially means that every current exemption is on the table.” Lawmakers “will be looking at how they tax our reserves,” at the tax threshold for insurers on municipal bonds and at “a host of other taxes,” he said.

“Tax reform could have potentially far more sweeping effects in the longer run,” said Robert Hartwig, president of the Insurance Information Institute Inc. in New York. “That certainly was the case with the last major tax reform in 1986.”

“Tax reform is a concern for insurance companies. However, most insurance companies believe that is something outside of their control, whereas underwriting is something they can control,” Towers Watson's Ms. Wells said. “We're seeing them focus more on underwriting than on the potential and completely unknown impact of tax reform.”