Tax Reform’s Impact on the Insurance Industry
By Daniel J. Kusaila, CPA, Crowe HorwathAnchor

On Dec. 22, 2017, President Donald Trump signed into law the most comprehensive changes to U.S. tax code in more than three decades. As a result, insurance companies must begin to understand the impact this historical rewrite has on its future tax liabilities, surplus, and risk-based capital ratios. In general, the tax provisions will become effective for taxable years beginning after 2017. The bill contains general business provisions affecting all corporations, insurance-specific legislation, and international changes that affect many multinational insurers. 

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Insurance-Related Tax Provisions 


Following are several of the general provisions that affect the insurance and other industries: 

  • Modifies the current graduated rate system with a maximum tax rate of 35 percent to a flat tax rate of 21 percent
  • Repeals the corporate alternative minimum tax
  • Allows for 100 percent expensing of new and used equipment purchased from Sept. 28, 2017, through Dec. 31, 2022
  • Increases Section 179 expensing limitations to $1 million, the phaseout to $2.5 million, and allows Section 179 expensing of qualified improvement property
  • Limits net interest deduction to 30 percent of adjusted taxable income
  • Decreases the dividend-received deduction from 80 percent to 65 percent and from 70 percent to 50 percent
  • Disallows deductions for entertainment expenses.
  • Includes an employer credit for paid family and medical leave
  • Repeals the two-year carryback for net operating losses (NOLs)
  • Limits use of NOL carryforwards generated in 2018 or later to 80 percent of taxable income


    Property and Casualty (P&C) Insurers

    The legislation enacts the following changes for P&C insurers: 

  • Replaces the fixed 15 percent proration reduction in the reserve deduction with a reduction equal to 5.25 percent divided by the current maximum corporate tax rate. It also includes a 25 percent proration with a 21 percent corporate tax rate.
  • Requires P&C insurance companies to use the corporate bond yield curve, which typically will be a higher rate than what is used currently, in order to discount unpaid loss reserves under IRC Section 846.
  • Modifies the computation rules for “long-tail” loss payment patterns by extending the payout periods by up to a 14-year period.
  • Repeals the election to use company-specific rather than industrywide historical loss payment patterns pursuant to Section 847.
  • Repeals the rules for special estimated tax payments found in Section 847.
  • Preserves the current law for P&C NOLs, which will allow such NOLs to be carried back two years and carried forward 20 years to offset 100 percent of taxable income in applicable years. 

Life Insurers

The legislation makes the following changes for life insurers: 

  • Amends Section 807(d) life insurance reserves for a contract generally equal to the greater of the net surrender value of the contract or 92.81 percent of the reserve prescribed by the National Association of Insurance Commissioners with respect to that contract. The commissioners’ reserve valuation method (CRVM) and the commissioners’ annuity reserve valuation method (CARVM) are specifically prescribed for life and annuity contracts, respectively. For variable contracts, the amount of life insurance reserves for a contract is the sum of the greater of the net surrender value of the contract or the separate-account reserve amount under Section 817 for the contract, plus 92.81 percent of the excess of the amount determined using the tax reserve method.
  • Takes into account any resulting Section 481 adjustment from the difference in computing life insurance reserves from the current law to the new law over an eight-year period.
  • Increases the deferred acquisition expense capitalization percentages to 2.09 percent for annuity contracts, 2.45 percent for group life, and 9.20 percent for all other contracts. It also lengthens the amortization period from a 120-month to a 180-month period.
  • Repeals the small life insurance company deduction.
  • Adjusts the 10-year spread for changes in computing life insurance company reserves under IRC Section 807(f) to be consistent with IRS accounting change methodologies prescribed by Section 481.
  • Repeals policyholder surplus accounts put into effect prior to 1984. Any remaining policyholder surplus account balances are taken into income over an eight-year period beginning in 2018.
  • Modifies the life insurance company proration rules so that the company share of dividends equals 70 percent and the policyholder’s share equals 30 percent.
  • Modifies life insurance companies’ NOL deduction by adopting the general corporation rules under Section 172, as discussed in the important general business provisions. 

International Insurers

The legislation includes the following provisions that will affect many insurance carriers. Due to the vast changes in the international area, changes other than those outlined here also might be applicable: 

  • Moves to a modified territorial system of international taxation. Requires deemed repatriation on a 10 percent U.S. shareholder’s pro rata share of the foreign corporation’s post-1986 tax-deferred earnings included as subpart F income in years including Dec. 31, 2017. It applies a 15.5 percent tax rate to accumulated earnings held in cash, cash equivalents, or other short-term assets. An 8 percent rate applies to the residual accumulated earnings invested in illiquid assets.


  • Amends current law insurance exception by exempting insurance companies that satisfy a new definition of a qualified insurance corporation from the passive foreign investment company (PFIC) rules. A qualified insurance company is required to maintain insurance liabilities that constitute more than 25 percent of its total assets. Insurance liabilities include loss and loss adjustment expenses, reserves (other than deficiency, contingency, or unearned premium) for life and health insurance risks, and life and health insurance claims.


    Relief exists for foreign corporations that cannot satisfy the 25 percent test by allowing the U.S. person who owns the stock of the foreign corporation to elect to treat the insurance company as a qualifying insurance company. This designation is allowable only if the foreign company’s applicable liabilities equal 10 percent of its assets, if the company is predominately engaged in an insurance business, and if the failure to satisfy the 25 percent test is solely due to runoff or rating-related circumstances. 

  • Modifies the subpart F rules by eliminating the 30-day rule under Section 951(a)(1) and changing the definition of a U.S. shareholder to include any U.S. person who owns 10 percent or more of the total value of the shares of stock of the foreign corporation.


  • Creates a new minimum tax on excess modified taxable income at a rate of 10 percent (5 percent for first year beginning after 2017) via the base erosion anti-abuse tax (BEAT). BEAT is determined by adding back to adjusted taxable income certain deductible payments made to a foreign affiliate (base erosion payments) for the year. It applies to corporations subject to U.S. net income tax with average annual gross receipts of at least $500 million that have made related-party deductible payments totaling 3 percent or more of the corporation's total deductions for the year.


  • Imposes an additional 10.5 percent tax on a U.S. shareholder's aggregate net controlled foreign corporation (CFC) income that is treated as global intangible low-taxed income (GILTI). GILTI generally is CFC income in excess of a deemed routine return on its tangible depreciable assets. 

Change Is Here

The changes discussed affect insurance companies of all sizes from both a financial statement and tax return perspective. Stay tuned for more information to help understand the changes and any potential impact they might have on operations. 

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Dan Kusaila, Partner
Crowe Horwath LLP
+1 860 470

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