CAS Monograph No. 11: Federal Income Taxes — Provisions Affecting Property and Casualty Insurers: An Update to the Almagro/Ghezzi Paper of 1988 and the Feldblum Paper of 2007
by Arlene M. Richardson, FCAS, MAAA and Joel S. Chansky, FCAS, MAAA
This paper provides an overview of the key provisions in the 2017 Federal Income Tax Legislation (called the Tax Cuts and Jobs Act, and referred to as the “2017 FITL” in this paper) affecting property and casualty insurers, all of which are effective for tax years beginning after December 31, 2017. Some of the provisions affect all corporate taxpayers and some are unique to property and casualty insurers. The focus of the paper is on after-tax income and the strategies that property and casualty insurers may consider in optimizing after-tax income. The tax calculations in this paper are performed at a high level and are not intended to capture all of the nuances and details of an actual tax return. Rather, the examples and calculations are intended to illustrate the impact of the changes in the tax law, as well as to illustrate the impact of different investment and pricing strategies on after-tax income. The first section of the paper provides background information on the key federal tax changes of 1986 and 2017 and the impacts on property and casualty insurers. The Tax Reform Act of 1986 (referred to as the “1986 FITL” in this paper) was the last major change in the federal tax law prior to the 2017 FITL. Historical context is important in understanding where we have been. We also include a notional company’s income statement and balance sheet as of December 31, 2017, and use this as the basis for testing the impact of the various changes in the 2017 FITL. The second section of the paper focuses on the impact of the 2017 FITL on investment strategies of property and casualty insurers. The third section of the paper a) focuses on the changes made to the marginal tax rates and rules for discounting loss reserves of property and casualty insurers, and b) quantifies the impact of the changes on the notional company’s after-tax income. The fourth and final section of the paper discusses pricing considerations for property and casualty insurers and illustrates after-tax income (expressed as internal rates of return) both pre- and post-2017 FITL. A sample approach is provided for quantifying the percentage change in 2018 premium rates required to achieve the same internal rate of return as that based on pricing models that were used in 2017 prior to the passage of the 2017 FITL to promulgate 2018 premium rates, with only the change in the tax law as a “variable.”
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