[Taxation of Property/Casualty Insurance Industry]

Published: Aug 20, 1985. Publicly Released: Aug 20, 1985.

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GAO views on the taxation of the property and casualty insurance industry were given. GAO believes that Congress should reexamine several aspects of the tax code dealing with property and casualty insurance companies because, although they had about $28 billion in underwriting losses from 1974 through 1983, they had about $100 billion in investment gains during that period, resulting in a total gain of about $72 billion for those years. For the same period, the insurance industry paid about 2 percent of its total gains in federal income taxes, large companies paid a lower percentage of federal income taxes than smaller companies, and many companies did not pay federal income taxes because of certain tax advantages. Therefore, GAO has recommended that Congress reexamine three areas of tax code: (1) the deduction allowed for loss reserves; (2) the practice of currently deducting all of the expenses associated with the sale and renewal of insurance policies; and (3) deductions for the protection against loss account, which defers a portion of a company's income to provide a cushion for catastrophic loss. GAO believes that, for tax purposes: (1) loss reserves should be discounted in calculating the loss reserve deduction based on a moving average of each company's net return on its investment portfolio; (2) acquisition expenses should be allocated over the life of related contracts; and (3) the continuation of the special tax preference for the protection against loss accounts should be questioned since they may not protect companies against catastrophic losses.

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