If done correctly, comprehensive tax reform at the federal level has the potential to bring:
simplicity in the code so that taxpayers understand the rules and can comply with them correctly and in a cost-efficient manner;
clarity and certainty to enable taxpayers to determine what tax is to be paid with reasonable certainty based on the nature of their business transactions and to plan for the future accordingly;
neutrality to minimize the effect of the tax law on a taxpayer’s decisions as to how to carry out a particular transaction or whether to engage in a transaction;
and appropriate transition relief to provide fair and equitable treatment for taxpayers that have generated substantial tax attributes based on current law.
For property/casualty insurance companies, there is also the potential for very negative impacts to come from attempting to reform the tax code. NAMIC has been educating lawmakers about the business of property/casualty insurance and how it differs from other financial services sectors, the importance of our industry to the economy, the cyclical nature of insurance, the significance of the conservative statutory accounting system, and the consequences for American consumers of changes to certain tax policy.
For example, the basic components of insurance company taxable income are taken from the annual statement and based on statutory accounting. Statutory accounting is designed to ensure solvency and maintain adequacy of capital. Continued reliance on statutory accounting for loss reserving, a highly complex actuarial estimation process that is subject to current regulation and measurement standards imposed by statutory accounting principles and actuarial standards, is essential for proper insurance company income taxation. A reformed code should include clear statutory language that the annual statement controls the determination of taxable income. Tax reform should retain Subchapter L rules for taxation of insurance company income.
The deduction of loss reserves, discounted to present value, is essential to properly account for the front-loaded nature of property/casualty income (companies receive premiums prior to making claim payments) and the back-loaded nature of property/casualty expenses and ensure funds are available to meet claims. The matching principle requires the alignment of income and expenses. Deductibility of loss reserve is essential to achieve this balance and ensure proper cash flow to meet claims obligations.
Finally, preserving Net Operating Loss (NOL) carrybacks help address the cyclicality of catastrophe losses by generating tax refunds that provide a needed source of funds to meet the policyholder claims.
NAMIC supports comprehensive tax reform designed to reduce complexity, lower rates, increase international competitiveness and provide certainty to the U.S. tax system. The overall goals of any tax reform effort should be to strengthen U.S. economic growth, and enhance the competitiveness of U.S.-based companies in U.S. and international markets. The strength and vitality of the U.S. property/casualty industry is critical to achieving these goals.
NAMIC also supports preserving specific tax treatments for insurance companies, including Subchapter L’s conformity with statutory accounting, the deductibility of loss reserves, and the ability to utilize NOL carrybacks.