AM Best evaluates potential US regulatory changes’ impact on reinsurers

A planned corporate tax reduction and a tax on imports in the US would benefit local entities but impact companies based outside the country such as in Bermuda, leading to changes in companies’ operating structures, according to AM Best.

The US may reduce its federal corporate tax rate to around 15-25 percent. Currently, the country has some of the highest corporate tax rates in the world at 35 percent, nearly double the UK rate of 20 percent for example.

A lower tax rate in the US is intended to bring business back onshore to stimulate the economy, AM Best said in a regulatory review titled “Shifting Tides in Global Regulation

Present Challenges and Opportunities”. This in and of itself would benefit US re/insurers, but the benefit would be even greater if lowering the corporate tax is combined with a tax on imports, the ratings agency said.

A border adjustment tax (BAT) could radically change the way companies are levied, taxing imports and exempting exports. Although US companies pay 35 percent tax on profits generated in the US, it is only payable on profits made outside the US when those profits are repatriated. For this reason, large amounts of foreign earnings never make it to the US.

Changes on the import tax would have significant consequences for the Bermudian re/insurance sector, as the country’s biggest export is a sizable import for the US, the analysts explained.

Senator Mark Warner and Representative Richard Neal introduced a bill in September 2016 during the previous Congressional session that was intended to prevent the “avoidance of tax through reinsurance with non-taxed affiliates.” For jurisdictions that do not tax reinsurance premiums, the deductions for reinsurance cessions from the US to affiliates in those jurisdictions would not be allowable as a tax deduction, according to AM Best.

Ultimately, should tax and regulatory changes regarding treatment of internal group reinsurance result in lower after tax earnings, organizations would likely respond by finding alternative operating structures to sustain earnings and manage capital cost efficiently. This may lead to the decline of one domicile over another, but that remains very uncertain at this point, according to AM Best.

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