By Sean Kevelighan, CEO, Insurance Information Institute
After the Tax Cut and Jobs Act of 2017 passed late last year, the Insurance Information Institute received numerous queries about the impact on property/casualty insurers. Given our mission at I.I.I. is not rooted in direct lobbying advocacy, we consciously refrained from engaging in what was sure to be (and was, in fact) a political battleground in some areas during the legislative process. That said, the industry deserves credit for coming together in many ways to ensure insurance receives fair treatment — a lesson learned from 1986 when the industry was sidelined.
While the anti-insurance crowd (most often misleading themselves as “pro consumer” groups) has been quick to add political rhetoric in the form of baseless and wildly exaggerated claims the industry will receive a “windfall” of income, the I.I.I. will, once again, adhere to facts that are based on actuarial and economic soundness.
Objectively, the I.I.I. sees the overall benefits to tax reform for the insurance industry to be well under 1 cent for every premium dollar.
How do we get that estimate?
Equity analysts at J.P. Morgan estimate tax reform would be about 5 percent of industry earnings, which seems reasonable based on what we know. In 2016 – 2017 industrywide results aren’t out yet – net income was $42.6 billion. Five percent of that would be a bit over $2 billion – more than I have in my pocket, but only about one-third of 1 percent of the $600 billion the industry wrote that year.
Here are a couple of other things to consider about insurers and taxes:
- Insurance companies pay a wide variety of rates. They pay one rate on underwriting profits, another on dividends from preferred stock, another on bond payments and yet another on municipal bond payments which are almost, but not quite, tax-free. The headline rate fell considerably, but many of the other rates didn’t change at all.
- Some companies may get a tax increase. Foreign-based groups that have historically ceded a portion of their U.S. business to an offshore affiliate based outside the U.S. are now subject to the Base Erosion and Anti-Abuse Tax – call it BEAT. However, the reduction in the overall tax rate may offset the other changes, depending on each company’s circumstances.
It is important to understand that insurance costs will quickly adjust to the new tax reality. Insurers in the largest lines – personal auto and homeowners – adjust their rates annually – sometimes more frequently. The rate – by law – explicitly reflects every cost an insurer incurs, including taxes. When the tax law changes, insurers build the new rate into their models.
Much like any business in America, insurance will use some of the benefits to invest — in its employees, products and services — so as to improve and grow. Given the industry is the second largest financial services contributor to our economy (2.8% of GDP), employing nearly 3 million Americans, it is critical that insurers make their own decisions. If not, then where does the line get drawn? Next, the anti-business crowd would (or perhaps already has) call on other industries to make uneconomic pricing decisions.
Update: This blog post has been changed to clarify information regarding the BEAT tax.