Best comments on US tax change impact
The ratings of some insurance and reinsurance groups could be affected by the impact of the reform of US tax law.
AM Best said that anticipated structural changes to certain reinsurance arrangements between affiliated insurance or reinsurance companies, particularly those domiciled in the US, could impact the rating agency's assessment of group rating affiliations.
The agency said its “rating unit” concept in evaluating insurance group members recognises that the financial fortunes of certain members may be so intertwined that they are most appropriately analysed with their group as a whole.
Several Bermuda insurance groups have American-based insurance subsidiaries and cede a proportion of that business to a Bermudian-based affiliate in the form of quota share reinsurance.
According to a new Best's Briefing, titled Impact of US Tax Reform on Group Rating Affiliations, AM Best expects its rated American-domiciled insurers and reinsurers to make significant changes to material financial arrangements, such as quota share, excess of loss or stop-loss reinsurance agreements with foreign affiliates, in response to the Tax Cuts and Jobs Act's base erosion and anti-abuse tax measure.
The agency said material changes to a reinsurance agreement, or outright non-renewal, for any reason, could affect AM Best's assessment of whether a parent is willing and able to provide explicit support to an affiliate. However, it also said explicit support is one of ten qualitative and quantitative factors used to assess group rating affiliation eligibility, and it will consider all of these, “including all forms of explicit support, on a situational basis”.
AM Best expects tax reform to be a net positive for the financial position of US property/casualty insurance companies and American-parented global insurers and reinsurers. The agency said the largest benefit will be the reduction in the corporate tax rate; however, other tax reform provisions may limit the benefit of the reduction.
AM Best noted that foreign-parented global re/insurers have publicly stated that the impact of tax reform will not be material, presumably as a result of the multiple platforms in which they can transact business.
To access the full briefing, visit https://tinyurl.com/yaulosjj