While the immediate impact of the corporate tax rate reduction on re/insurers is expected to be the write-offs of deferred tax assets and liabilities according to the Kroll Bond Rating Agency (KBRA), some experts predict an overall industry boost of 15% net income growth for 2018 and 2019.
However, the question of how re/insurers will choose to put these tax savings to use and whether it will result in downwards pricing pressure.
Re/insurers which have often been over reliant on reserve releases in order to boost profitability could choose to channel the additional income back into the business through increased shareholders’ dividends and/or share buybacks.
Recent years have seen the industry invest ever-increasing sums into InsurTech start-ups or collaborations, and with players caught up in the innovation race, additional profit could be channelled into supporting this growth.
KBRA cited Alan Dobbins, a Director of Insurance Research at Conning, who said that the firm’s proprietary P&C model had forecast that a corporate tax rate reduction to 21% will “increase the industry’s net income by approximately 15% for 2018 and 2019.”
However, re/insurers will have to take initial steps of re-evaluating the new tax regime’s impact on deferred tax assets and liabilities to make appropriate write-downs.
As industry players take into account the lower tax rate as well as the preservation of the net operating loss deductions for U.S. P/C insurers with a carry back of 2 taxable years and carry forward of 20 taxable years up to 100% of taxable income, the result will be a substantial decrease in the net deferred tax assets across the industry.
Multinational insurers with business ceded from U.S. subsidiaries to foreign-domiciled subsidiaries could face prospective loss of business, due to the Base Erosion Anti-Abuse Tax (BEAT) provision, and will likely take steps to re-allocate capital or reshuffle business.
Thus KBRA expects the BEAT to result in a significant reduction in the estimated $90 billion in premiums ceded by U.S. subsidiaries to affiliates.
As an example of how firms are reallocating business in response to the BEAT, KBRA noted changes made by James River Group JRG, which “formed a new Bermuda reinsurer, Carolina Re (wholly owned by its U.S. entities) that made a 953(d) election to become a U.S. corporate tax payer.
“Coinciding with the formation of Carolina Re, JRG restructured its internal quota share agreement to Carolina Re, enabling JRG to manage the exposure to the BEAT provision of the Act.”
As many U.S. carriers with off-shore operations look to safeguard the flexibility offered with foreign domiciles and manage for tax optimized results, KBRA believes the general response will be an increasing net to gross written premium ratio and continued balance sheet growth in U.S. P/C insurers.
Meanwhile, institutions such as the Consumer Federation of America (CFA) have been lobbying for the tax savings to trickle down to the customer with reduced rates.
J. Robert Hunter, Director of Insurance at the CFA, sent a letter to the insurance commissioners of all 50 states, and the District of Columbia, calling for “immediate action to require insurers to file lower rates to reflect the federal tax legislation passed by Congress late last year and effective for 2018 forward,” noted KBRA.
In addition, two of the 19 states (CA and NC) which require prior approval of rate filings have opened regulatory reviews of insurers’ rates as a response to the new federal tax rules.
In calling for reduced rates, KBRA said the CFA highlighted the impact of the profit provision allowed in rate filings with expectations for a net positive impact on earnings going forward.
Therefore while the U.S. tax reform will be a net positive impact on the U.S. property/casualty re/insurance industry’s bottom line after an initial period of adjustment, how re/insurers choose to reinvest the additional net income and whether it will result in a reduction in pricing remains to be seen.
In an environment of intense market competition, the InsurTech innovation drive, influx of alternative capital, and giant tech players such as Google seeking inroads into the re/insurance space, what’s certain is that firms will be carefully considering where additional net income could have the greatest impact.
