A.M. Best expects that overall, the insurance industry will see benefits from the reduction in corporate tax rate as a result of The Tax Cuts and Jobs Act, although certain enhancements are likely to mitigate the benefits.
The new U.S. tax reform legislation is still awaiting the signature of President Donald Trump, but once signed into law, the ratings agency expects insurers to see overall benefits.
A.M. Best explains that certain provisions are expected to have the greatest impact on insurers, such as the repeal of the loss carryback period for life insurers, which could potentially “reduce the amount of gross deferred tax assets that can be admitted, thereby reducing capital and surplus.”
However, increased after-tax earnings could offset the surplus declines, says A.M. Best, warning that this could take some time emerge.
Both life and P/C companies are likely to be impacted by reserve changes, says A.M. Best. Adding; “however, changes applicable to business in effect as of Dec. 31, 2017 will be spread over the next eight years. While life insurance risk-based capital ratios could be significantly impacted, the required capital in Best’s Capital Adequacy Ratio may not change significantly.”
For reinsurers, A.M. Best states that domiciles that had tax advantages might be impacted as more transactions could move back onshore.
“Many P/C insurers and reinsurers use after-tax PML as a data point in the calibration of their catastrophe risk tolerances. These insurers will have to revisit the calibrations and consider increased after-tax PMLs, and balance that with increased after-tax earnings,” says A.M. Best.