Tax Policy and Administration:
Taxation of the Insurance Industry
Feb 20, 1986
A speech was given presenting GAO views on: (1) the taxation of the insurance industry; (2) property and casualty insurance companies' pricing strategies; (3) the impact of certain current tax provisions on the industry; and (4) the consolidation of property/casualty companies with parent companies that are not in the insurance business. Because the ability to offset underwriting and investment income can play an important role in a company's pricing strategy, many companies have been charging lower premiums to compete for certain insurance lines even though they have ratios of claims and expenses to premiums in excess of 100 percent. These companies make up the premium shortfall through investment income. GAO found that, in spite of its underwriting losses, the industry as a whole had positive net gains but had negative federal income tax rates in relation to net gains. Because of certain tax advantages, many property/casualty insurance companies have not paid income taxes for a number of years and, in fact, have qualified for refunds or the ability to carry back or carry forward losses for tax purposes. Special provisions of the Internal Revenue Code enable these companies to report losses for tax purposes even when they are operating at a profit. If a property/casualty company were independent, it might not be able to use losses immediately for tax purposes; however, many of these companies are owned by a noninsurance parent company which uses all of the losses to offset the taxable income of the parent company. In addition, the basic liquidity and constant cash flow of a property/casualty company ensures that funds will be available to a parent company for various investments, such as tax-exempt securities. GAO concluded that Congress should reexamine three areas of the tax code: (1) the deduction currently allowed for loss reserves; (2) the practice of deducting all of the expenses associated with the sale and renewal of insurance policies; and (3) the protection against loss account which defers a portion of a mutual company's income to provide a cushion for catastrophic loss. These changes would result in a better match of the industry's revenues and expenses and represent a more rational approach to its taxation.