Insurance companies in all their guises face significant changes from almost every direction as a result of the recently enacted tax reform legislation in the United States of America (US). The impact arises whether they are owned by US or international persons and whether they are engaged in reinsurance, life assurance or general insurance activities. The potential scale of the impact is breath-taking in both depth and in scope. More so than for any other industry, it may lead to transformative change for the insurance sector.
In a previous article, we focused on the impact of the BEAT (Base Erosion Anti-Abuse Tax) on the insurance sector. In this article, Liam Lynch and Tom Hennebry focus on US tax reform changes that affect US owned groups with international operations or indeed just income from international sources. Our analysis will address specific regimes within the overall tax reform measures including GILTI (Global Intangible Low Taxed Income), FDII (Foreign Derived Intangible Income) and the related concept of QBAI (Qualified (tangible) Business Asset Investment). Our article does not cover entirely domestic US tax reforms.
The stated aim of the tax reform measures has been to create a US tax environment which supports job creation in US. In the case of the insurance sector, it seems certain that tax reform will result in the repatriation of a large amount of overseas insurance underwriting to the US. While the effect of this on job creation is uncertain, it will certainly mean the repatriation of large amounts of capital into the US where related profits can be taxed at the new federal corporate income tax (CIT) rate of 21%.
The question insurance groups are asking themselves is whether the new lower CIT rate in the US can offset the effect of changes that will see a much greater portion of their global profits subject to tax at higher effective tax rates than before.
In particular, Liam and Tom consider if these changes could result in a need for more capital to be raised onshore in the US? Will this result in a higher cost of capital for insurers, and ultimately will this be reflected in increased insurance premiums? Could this result in a radical restructuring of how the reinsurance industry operates?