Touted as the most significant federal tax legislation since 1986, Public Law 115-97 – informally known as the “Tax Cuts and Jobs Act” (the “TCJA”) – was enacted on December 22, 2017. This article examines the potential impact of several provisions of the TCJA on the insurance industry.
The changes in the TCJA to domestic corporate tax provisions, including the corporate tax rate reduction and elimination of the alternative minimum tax, should benefit insurance companies.
However, a number of provisions that apply specifically to insurance companies were included as revenue raisers. Among these are changes in the tax reserve calculations for life and property and casualty (“P&C”) insurance companies, changes to the deferred acquisition cost and proration rules for life companies, and a modification of the discounting rules for P&C companies. Although these changes may increase the taxable income of insurance companies, they are not as onerous as earlier proposals, and they are intended to reduce the tax compliance burden by simplifying reserve calculations and better aligning such calculations with evolving statutory accounting practices.
International tax provisions are likely to have significant consequences (mostly unfavorable) for insurance companies with activities outside of the United States.
General Corporate Provisions
The federal corporate income tax rate is reduced to 21%.
The corporate alternative minimum tax is repealed.
Net operating losses (“NOLs”) incurred after 2017 cannot be carried back, but can be carried forward indefinitely to offset only up to 80% of taxable income in any year.
Taxable income is generally recognized no later than when it is taken into account as revenue in the taxpayer’s financial statements
Insurance Company Tax Provisions
NOLs of Insurance Companies
The TCJA repeals the previous special operations loss carryover and carryback provisions for losses generated by life insurance companies after 2017 and applies to them the general corporate NOL rules (described above). P&C companies, however, continue using the old rules, which allow NOLs to be carried back for two years and carried forward for 20 years, and to offset 100% of taxable income.
Computation of Life Insurance Reserves for Tax Purposes
The TCJA changes the computation of life insurance reserves for purposes of determining the deduction for reserve increases. Life reserves for most contracts generally are the greater of (a) the net surrender value of the contract, or (b) 92.81% of the reserves determined under the statutory reserve method. For variable contracts, the net surrender value of the contract is replaced with the separate-account reserve amount (if greater than the net surrender value). Life reserves cannot exceed the amount of statutory reserves in the financial statements of the company. The TCJA requires using CRVM/CARVM in effect as of the date the reserve is determined instead of the issue date, which is expected to simplify calculation of life reserves.
For the full article, refer to page 8 in the Spring 2018 issue. https://www.airroc.org/assets/docs/matters/AIRROC_Matters_Spring_2018_Vol_14_No_1.pdf