WHAT TO EXPECT? TAX REFORM: Stroock Excerpts
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Spring 2018
Vol. 14 No. 1
LEVERAGING LEGACY LIABILITY
www.airroc.org
TAX REFORM:
WHAT TO
EXPECT?
GOVERNANCE INC. • INSURANCE IS TAXING • ARE WE THERE YET? • SURVEY SAYS!
CERCLA SETTLE • WE "STROOCK" GOLD • HARE-ROC • YOU ARE UNIQUE • SPRING FEST
EMERGING
REGULATORY
ISSUES
The Impact of the
Tax Reform Act The changes in the TCJA to domestic
corporate tax provisions, including
on the Insurance
the corporate tax rate reduction and
elimination of the alternative minimum
tax, should benefit insurance companies.
Industry 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
Touted as the most significant rules for P&C companies. Although
these changes may increase the taxable
federal tax legislation since income of insurance companies, they
are not as onerous as earlier proposals,
1986, Public Law 115-97 – and they are intended to reduce the
tax compliance burden by simplifying
informally known as the “Tax reserve calculations and better aligning
such calculations with evolving statutory
Cuts and Jobs Act” (the “TCJA”) accounting practices.
– was enacted on December International tax provisions are likely to
have significant consequences (mostly
22, 2017. This article examines unfavorable) for insurance companies
with activities outside of the United
the potential impact of several States.
provisions of the TCJA on the General Corporate Provisions
insurance industry. • 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is repealed.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
8 AIRROC MATTERS / SPRING 2018
Micah W. Bloomfield, Michelle M. Jewett & Daniel Martinez
provisions for losses generated by life International tax provisions loss reserves. The TCJA replaces the
insurance companies after 2017 and are likely to have significant previous 15% proration percentage
applies to them the general corporate consequences (mostly with 25% to account for the corporate
NOL rules (described above). P&C tax rate reduction.
companies, however, continue using unfavorable) for insurance
the old rules, which allow NOLs to be companies with activities Life Insurance Contracts in the
carried back for two years and carried outside of the United States. Secondary Market
forward for 20 years, and to offset 100%
The TCJA overrules the portion of
of taxable income. ---------------------------------- Revenue Ruling 2009-13, which held
Computation of Life Insurance Reserves that on sale (but not surrender) of a
for Tax Purposes life insurance policy, the seller’s basis is
the interest rate used for discounting
reduced by the cost of insurance. The
The TCJA changes the computation reserves is determined based on the
TCJA’s repeal of this holding applies
of life insurance reserves for purposes corporate bond yield curve rather than
retroactively to sales of life settlement
of determining the deduction for mid-term AFRs.
policies entered into after August 25,
reserve increases. Life reserves for The TCJA also repeals the election 2009. A number of new reporting
most contracts generally are the greater permitting a taxpayer to use its own requirements apply to purchases of
of (a) the net surrender value of the historical loss payment patterns and insurance policies by persons unrelated
contract, or (b) 92.81% of the reserves extends the period over which some to the insured.
determined under the statutory reserve reserves are discounted.
method. For variable contracts, the International Taxation
Any income (or loss) resulting from the
net surrender value of the contract is
adjustment is included ratably in income
replaced with the separate-account BEAT
over eight taxable years starting in 2018.
reserve amount (if greater than the A new Base Erosion and Anti-Abuse
net surrender value). Life reserves Deferred Acquisition Costs Tax (“BEAT”) imposes a minimum tax
cannot exceed the amount of statutory on a corporation’s “taxable income”
The TCJA increases the capitalization
reserves in the financial statements of calculated by adding back deductions
rates of “specified policy acquisition
the company. The TCJA requires using for payments to foreign affiliates and a
expenses” from 1.75% to 2.09% for
CRVM/CARVM in effect as of the date portion of net operating loss carryovers.
annuity contracts, from 2.05% to 2.45%
the reserve is determined instead of the The BEAT applies to taxpayers that have
for group life contracts, and from 7.7%
issue date, which is expected to simplify average annual gross receipts in excess
to 9.2% for all other specified contracts.
calculation of life reserves. of $500 million (for the three prior tax
The amortization period is increased
The difference for existing contracts from 120 months to 180 months. years) and a “base erosion percentage”
between the new reserve and the of at least 3% for the taxable year (2%
old reserve is taken into income (or Proration Rules for a member of a financial group). The
deducted) ratably over eight years. Life insurance companies are required BEAT may affect insurance companies
The TCJA shortens the period for to reduce their deductions, including with foreign affiliates because base
taking into account income or loss the dividends received deduction erosion payments include any premium
resulting from other changes in method (“DRD”) and the reserve deduction, or other consideration paid to a related
of computing life insurance company to reflect that a portion of their tax- foreign reinsurer. Currently, it is unclear
reserves to four-years for income and exempt income is used to increase whether the addback of deductions will
one year for losses. policyholders’ reserves or is attributable apply to gross premiums or net profit on
to policyholders. The TCJA simplifies the ceded business.
Discounting for P&C Companies the calculation of the DRD and reserve
deductions by fixing the company’s Participation Exemption and
The TCJA changes computation
of reserves for P&C companies by share at 70% and the policyholders’ Repatriation Tax
extending the discount period for long- share at 30% (instead of the previous The TCJA shifts the U.S. corporate tax
tailed policies and using a method that complex allocation formulas). system closer to a territorial system by
generally should increase the discount P&C companies are required to prorate providing a participation exemption
interest rate. The TCJA provides that the deductible amount of their incurred for foreign-sourced dividends (but
AIRROC MATTERS / SPRING 2018 9
Tailored Expert Legal Advice to the Insurance Industry Laura Besvinick Lewis Murphy lbesvinick@stroock.com lmurphy@stroock.com Beth K. Clark Bernhardt Nadell bclark@stroock.com bnadell@stroock.com Michele L. Jacobson Julie E. Nevins mjacobson@stroock.com jnevins@stroock.com Robert Lewin rlewin@stroock.com www.stroock.com new york • los angeles • miami • washington, dc
REGULATORY
The Impact of Tax Reform (continued)
not for Subpart F inclusions) paid Under the new definition, foreign persons may now be attributed
by certain foreign corporations to to a U.S. entity in which it owns an
10% U.S. corporate shareholders and
a “U.S. Shareholder” is a interest for purposes of making the
imposes on 10% U.S. shareholders a person who owns at least U.S. person a “U.S. Shareholder.” Many
one-time tax on unrepatriated and 10% of the vote or value existing corporate structures will have to
previously untaxed earnings and profits of the foreign corporation be reexamined and modified in light of
of specified foreign corporations at these changes.
(previously, value was
the rate of 15.5% for cash and other
liquid assets and 8% for other earnings.
irrelevant). PFICs
There is an election to pay this tax in The TCJA changes the passive income
installments over eight years. ---------------------------------- test for purposes of the passive foreign
The TCJA repeals the indirect foreign investment company rules by generally
tax credit for dividends received from Shareholder” is a person who owns at excluding income derived in the active
a foreign corporation, but retains it for least 10% of the vote or value of the conduct of an insurance business by
Subpart F inclusions. foreign corporation (previously, value a corporation only if the applicable
was irrelevant). Another significant insurance liabilities constitute more than
Modifications of CFC Rules change is that certain stock owned by 25% of its total assets. l
Notwithstanding the general territorial-
ity rule, the TCJA imposes a new tax on
a U.S. shareholder’s share of a controlled Micah W. Bloomfield
foreign corporation’s (“CFC”) “global in- (left) and Michelle M.
tangible low-taxed income,” or “GILTI,” Jewett (center), Partners
at a 10.5% rate. GILTI is active income in the Tax Practice Group
in excess of an implied return of 10% of of Stroock & Stroock &
the CFC’s adjusted basis in tangible de- Lavan LLP, and Daniel
preciable property used to generate the Martinez (right),
active income. associate in Stroock’s Tax
Practice Group.
The TCJA changes the definition of
“U.S. Shareholder” for purposes of the
application of the Subpart F provisions.
Under the new definition, a “U.S.
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(ARe 145)
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business or law related advanced degree
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AIRROC MATTERS / SPRING 2018 11AIRROC
at 180
Maiden
Lane
AIRROC kicked off the
2018 programming with co-
sponsoring firm Stroock Stroock
& Lavan in downtown NYC
on January 17. It was a snowy
day but that didn’t stop our
attendees! A crowd of 80 came
to hear education sessions on
topics such as, “Managing the
Program Manager,” “The Future
of Claims,” “Florida Bad Faith,”
“Insurance Business Transfer
Statutes,” and a keynote by
former Delaware Insurance
Commissioner Karen Weldin
Stewart. It was a great way
to start the year for AIRROC
members.
Photos: Jason Gerber
Photos Jean-Marc GrambertCONTINUING ED
Educational Summaries
Lessons from the Front: scandals involving program managers,
the panel stressed the need to perform
good faith claims-handling, and avoiding
bad faith claims.
Managing the Program Manager due diligence and proper vetting Bad faith claims have become something
Regan Shulman (Vice-President and Dep- of the proposed program manager of a “cottage industry” in Florida. Certain
uty General Counsel of Arch Insurance before entering into the relationship. policyholder counsel employ bad faith
Company) and Michele Jacobson and In addition, New York Insurance “set-up” strategies, particularly in cases
Robert Lewin (both Partners at Stroock) Department Regulation 120 and the where the liability is uncertain, but there
discussed the historical issues that insur- NAIC Model Managing General are high damages. In practice, there is
ance companies have faced in relation- Agents Act provide guidance on written little difference between what is required
ships with program managers and offered agreements with program managers, for a bad faith claim in Florida state
practical solutions on how to manage including the need for a written court and ordinary negligence. Although
agreement that clearly sets forth financial the legal standard is different, it is very
those relationships productively.
and reporting responsibilities and makes difficult to prevent a bad faith claim from
The panel began by reminding attendees clear that the program manager holds all getting to a jury in Florida state court.
of historical scandals involving MGAs funds in a fiduciary capacity. The written Florida is one of the few states that
and MGUs, including Unicover, and agreement should specify applicable require a settlement offer even without
referenced the Dingell Report, which underwriting controls, such as premium a demand where the liability is “certain”
recommended additional regulation caps and renewal criteria, and appropriate and the damages are significant (e.g.,
of the relationship between insurance claims controls, including conditions likely beyond policy limits). A failure
companies and MGAs/MGUs. Next, under which the insurer should receive to settle, even absent a policyholder
the panel discussed the pros and cons of copies of the claim file and limitations demand, is one frequent scenario for a
relationships with program managers. on the program manager’s authority. bad faith claim. Another major problem
Among other benefits, the panel noted Further, the parties should clearly outline is the time-limited settlement demand,
that use of a program manager provides the responsibilities, if any, assigned to the where the policyholder may attempt to
enhanced premium volume and program manager in connection with set up a bad faith claim by providing
distribution channels, as well as access the reinsurance for the program. Lastly, some, but not enough, information.
to niche markets that might otherwise the written agreement should contain The panelists agreed that it is important
be unavailable to the insurer. One of provisions pertinent to the relationship to get ahead of the process by, for
the principal potential detriments to an between the insurer and the program instance, making a settlement offer first,
agency relationship is the fact that the manager, including termination and if possible, to show that the insurer is
MGA/MGU may have no skin in the suspension provisions, as well as dispute being proactive. Other suggestions were
game and is normally incentivized to resolution procedures. to ask for information before the insurer
generate premium. hears from the policyholder and to
Finally, the panel emphasized the need invite the policyholder to a meeting to
Ms. Shulman suggested that this issue for the insurer to oversee the program
could be addressed by tying the program discuss possible resolution. Should the
manager in a “hands-on” manner, policyholder say that it is “not ready,” the
manager’s compensation to experience suggesting the appointment of an in-
and by agreeing to initial premium caps insurer has effectively gotten itself out
house person to monitor compliance of bad faith territory. It is particularly
that could subsequently be adjusted. The with reporting and payment terms and to
panel discussed other possible detriments, important to stay engaged with the
maintain near-constant communication policyholder when there may not be
including the potential that the program with the program manager.
manager could commingle funds from enough in limits available (e.g., because
multiple programs, that the insurance Summary by Randi Ellias, Partner, Butler Rubin there are a number of insureds). The
Saltarelli & Boyd LLP, rellias@butlerrubin.com panel also discussed the importance of
company may not have adequate access to
the claims-handler being mindful that
records relating to the program, that the
comments in text messages will be treated
program manager might fail to promptly Florida Bad Faith Claims: Best the same as if they were written in the
pay claims, and that, in the event of a
dispute between the program manager
Practices In Claims Handling claim file, and that cell phone records
(both for company phones and personal
and the insurance company, the flow of Joanne McGovern (Claims Regional phones) may be subject to subpoenas.
information would cease, jeopardizing Vice-President for ProSight Specialty Other principles of good, common sense
reinsurance relationships. Insurance), joined Laura Besvinick and claims-handling are making sure that
The panel then discussed how to set Julie Nevins (both of Stroock & Stroock & the policyholder is aware of settlement
up program business to avoid these Lavan) to discuss the dynamics of claims- opportunities and the risks of an excess
lurking pitfalls. In light of previous handling in Florida, the hallmarks of judgment, advising the policyholder of
AIRROC MATTERS / SPRING 2018 23CONTINUING ED
Educational Summaries (continued)
probable outcomes, and acting in the protection (particularly, the interest to understand where claims operations
“best interests” of the insured. of policyholders). A second issue are headed. EY’s research included
Insurers also face special risks when has been the focus on insolvent and interviews with executives at commercial
they offer a defense under a reservation impaired companies, rather than solvent insurers, industry analysts, and FinTech
of rights. Florida courts permit the companies seeking finality with respect leaders. EY’s research revealed six key
policyholder to reject the defense as to old liabilities. Jim noted that Rhode drivers of change in the industry.
offered and to take control of the defense. Island’s Amended Regulation 68 may go
Most Florida courts will treat the offer of “as far as we can go,” but “legal finality” 1. Decreasing Claims Volumes
a defense subject to an ROR as a denial of remains an open question. Acosta stated that, while claims
coverage and permit the policyholder to Vincent Laurenzano and Bernhardt frequency will continue to decrease in
enter into a consent judgment. The panel Nadell addressed in detail the features of some lines, severity may increase in
discussed the requirements for collection the various statutory and regulatory ap- others. Claims frequency is expected
of the judgment, including the existence of proaches. With respect to Rhode Island’s to decrease in part due to increased
coverage, breach of the duty to defend, that Amended Regulation 68 and similar use of sensors for monitoring homes
the settlement amount was reasonable, voluntary restructuring provisions, the and businesses. Auto claims frequency
and some good faith component (i.e., principal question is whether other juris- and severity are expected to continue
absence of collusion). Although liability dictions will recognize the transfers. The declining as a result of improved driver
is not technically at issue, it will often be result is that there remains considerable training and vehicle safety, including
a “back door” consideration relevant to legal uncertainty. driver assistance technology. EY’s study
the reasonableness of the amount of the Eleni Iacovides discussed the European suggested increased volatility of claims
settlement. legal framework, arguing that in Europe and a likely increase in severity in some
transfers “work” and “quite easily” if product areas.
Summary by Robert D. Goodman, Partner, Saul, robert.
goodman@saul.com the prescribed steps are followed. The
2. Severe Weather
“beauty” of the European framework
Insurance Business Transfer is finality: “it will be over if you want it Severe weather is expected to drive an
to be over.” In order to do a transfer in increased frequency and localization of
Statutes Europe, the insurer needs to be solvent. weather-related claims. Acosta noted
A panel comprised of Eleni Iacovides The drivers are the cost of capital, claim that there are not enough third-party
of DARAG, Vincent Laurenzano and volatility, and the desire for finality. The vendors to outsource weather claims.
Bernhardt Nadell of Stroock & Stroock position of the policyholder will be as Consequently, insurers are building
& Lavan, Jim Wrynn of FTI Consulting, good as or better than before because specialized teams to quickly respond to
and Frank Schmid of AIG discussed the insurer will be as well capitalized or major events, such as fire and hurricanes.
the various statutory and regulatory better capitalized than before. These teams are expected to provide
provisions governing insurance better service and a faster response.
Frank Schmid discussed LPT and ADC
business transfers. The panel addressed Technology is expected to assist with
concepts as alternatives to the insur-
traditional statutory and regulatory preparation for such events to reduce
ance business transfer and division
procedures for handling impaired impact of the events and to more
approaches. All concepts involve the
and insolvent insurers in the United quickly respond.
transfer to policyholders of both financial
States, more recent U.S. statutes and and nonfinancial commitments. And all 3. Sensor Revolution
regulations for voluntary restructuring concepts play important roles in business
of solvent insurers (including Rhode Acosta explained that the increasing use
restructuring beyond the realm of dis-
Island’s Regulation 68, Vermont’s of sensors in businesses and homes will
continued business. The insurance busi-
Legacy Insurance Management Act, reduce claims frequency and severity.
ness transfer framework is an important
the Connecticut Division Statute, Sensors can be used to monitor for
tool for corporate restructuring and the
and proposed Oklahoma legislation), fire and flooding, permitting faster
improvement of capital allocation across
schemes of arrangement and Part responses. In cars, sensors could be used
the insurance industry.
VII transfers in the U.K., and the to auto report accidents to an insurer
legal framework in the European Summary by Robert D. Goodman, Partner, Saul, and record information about the
Union. The panel also addressed Loss Robert.goodman@saul.com accident.
Portfolio Transfers (LPTs) and Adverse
Development Covers (ADCs). The Future of Claims 4. Digital Disruption
Jim Wrynn noted that a major Jake Acosta of EY presented insights on The EY study showed that the insurance
issue has been the “laser focus” the future of claims. Acosta explained industry is being impacted by forces
in the United States on consumer that, in early 2016, EY conducted research outside the industry, where customers
24 AIRROC MATTERS / SPRING 2018are becoming accustomed to self-
service. Acosta noted that customers
will be increasingly willing and
able to allow the handling of
less-complex claims through
completely digital channels. Acosta
noted that insurers will be able to
mine significant data to assist in
evaluating risk.
5. Better Risk Management
Acosta explained that large
businesses have become more
proactive with improved risk
management capabilities, with a
greater focus on return from capital,
including insurance arrangements.
Businesses are tracking claims
incidents and have clearer insights
into the costs of risks. Acosta
explained this is likely to drive a
decrease in claims from these types
of policyholders.
6. Modernized Technology
The EY research showed that
robotic process automation (RPA)
or programmable software is
expected to handle simple claims,
which will more often be settled
automatically. Acosta explained that
technology will allow claims to be
filtered for complexity and assigned
accordingly. For example, a claim
for less than a certain threshold (e.g.,
$1,000), might be fully automated.
Future claims operations will be
leaner and will consist of smaller,
more specialized work forces. As
simple claims become automated,
only complex claims will be handled
by humans. Claims professionals
of the future are expected to be
more analytical, data driven, and
collaborative. Claims are expected
to be handled by teams of people,
with a reduction in the number
of hand-offs between staff and
departments. l
Summary by Julie Rodriguez Aldort, Partner,
Butler Rubin Saltarelli & Boyd LLP, jaldort@
butlerrubin.com
AIRROC MATTERS / SPRING 2018 25You can also read
