New Tax Regs Could Shake Up U.S. Life Reinsurance Gameboard

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The Internal Revenue Service (IRS) has completed work on a batch of Tax Cuts and Jobs Act of 2017 regulations that could, possibly, chase some non-U.S. reinsurers out of the U.S. life reinsurance market.

The IRS developed the regulations to implement the TCJA Base Erosion and Anti-Abuse Tax (BEAT) provisions. The BEAT provisions impose a new, 10% income tax increase on some U.S. companies that send cash to affiliates outside the United States.

Congress added the BEAT provisions in an effort to punish U.S. companies that shift, or pretend to shift, cash overseas simply to cut the amount of income the United States can tax.

The IRS is preparing to publish final BEAT regulations Friday, in the Federal Register. The agency has already put a preliminary version of the final rule, along with an introduction that summarizes the regulations and the comments on the draft version of the regulations, on the Federal Register website.

IRS officials have made two major sets of BEAT regulation decisions that could affect U.S. life insurers.

1. Payments for reinsurance claims and benefits: Officials gave U.S. insurers and reinsurers a win on this issue, by excluding payments related to non-U.S. reinsurance contract claims and benefits from the amount of international payments classified as tax base erosion payments.

This decision could be especially to the only major, independent, international life reinsurer based in the United States, Reinsurance Group of America Inc. RGA President Anna Manning had written to the IRS to say that excluding international payments made in connection with ordinary reinsurance company operations was critical to its being able to continue to write reinsurance in other countries while keeping its headquarters in the United States.

2. Offsets for reinsurance arrangements that require some money to flow out from the United States and some money to flow in: The IRS decided to make reinsurers count the full payments to non-U.S. affiliates in the base erosion payment totals, not just the net payments.

Commenters had differed on whether reinsurers should count the gross payments to non-U.S. affiliates or the net payments when adding up their base erosion payments.

Lawyers for non-U.S. life reinsurers and some U.S. direct writers had argued that the IRS should count the net payments to non-U.S. affiliates when calculating alleged tax base erosion payments.

Other commenters had said the IRS should count the net payments in some cases and the full payments in others.

The Coalition for American Insurance, which represents a number of large property and casualty insurers, including Allstate, American Financial Group and Berkshire Hathaway, had asked the IRS to include the gross payments in the base erosion totals, not the net payments.

IRS officials say reinsurance contracts that resemble financial derivatives arrangements will be treated as insurance arrangements, because there's no indication that Congress intended for insurance agreements with derivative-like characteristics to be treated as derivatives for BEAT purposes.

Impact on Agents

The commenters that wanted the IRS to let reinsurers put the net payments to non-U.S. affiliates in the tax base erosion total, not the gross payments, predicted that requiring the reinsurers to include the gross payments could weaken the supply of foreign reinsurance market.

Those comments "asserted that foreign insurers may decide to reduce their capacity, discontinue lines of business, or increase pricing" as a result of new base erosion tax bills, IRS officials write in a summary of the comments.

Some U.S. commenters argued that prohibiting netting would "level the playing field between U.S. and foreign-owned companies," according to the IRS summary.