Keefe Bruyette & Woods (KBW) expects the U.S. tax bill to impact the Property & Casualty insurance industry with lower pricing, due to the sector’s longstanding track record of price competitiveness.
KBW analysts forecast that personal lines will likely respond quicker to the lower tax rates than commercial, especially in specialty commercial lines; “widely varying current underwriting profit outlooks will also probably affect the speed of tax bill-related rate decreases; lower tax rates should justify rate decreases for profitable lines like Workers Compensation and Surety, while Commercial Auto and General Liability lines’ rates should initially keep rising in response to fading underwriting margins.
“On the other hand, we expect the brokers to broadly retain the bottom-line benefits of the domestic tax bill, especially since several brokers’ benefits should be offset by the elimination of current tax management strategies.”
Domestic Q417 reserve development will carry a 35% tax rate, which KBW said could imply a smaller after-tax impact on earnings and capital than the same development would in 2018’s lower tax era; “we think this will motivate some insurers to either report bigger reserve charges or smaller reserve releases than would happen without the tax bill backdrop.
“We obviously don’t expect this consideration to be made explicit, and we’re not suggesting explicitly fraudulent behavior, but at the very least, it seems reasonable to expect the timing of reserve development (and, for that matter, other potential charges) to reflect the economics of changing tax rates.”
KBW said the Tax Bill could result in the Bermudians being strategically disadvantaged due to losing the pricing advantage embedded in tax rates that had been lower than those anticipated for domestic carriers.
In addition, the shrinking difference between U.S. and Bermudian tax rates means an incrementally smaller opportunity for tax arbitrage that should incrementally reduce demand for reinsurance.
Thus as a result of the new Tax Bill, according to KBW, one of the marginal benefits of buying reinsurance from unaffiliated third parties is declining.