Odomirok 26 Taxes

Question 1

Tax-basis income vs. SAP income

Answer 1

Tax-basis is SAP with adjustments:
* EP is adjusted with a revenue-offset
* losses (or reserves) are discounted

Question 2

IRS revenue offset

Answer 2

• in SAP, acquisition costs are not deferred so the insurer would incur a loss
• the insurer would then be entitled to a future tax refund on this loss
• but IRS wanted to simplify the process: instead of a refund, IRS reduces UEP liability by 20% for all insurers

Question 3

Tax-basis Income formula

Answer 3

TBI = TBEP + InvInc - TBIL
TBI = Tax-Basis Income
TBEP = Tax-Basis EP
InvInc = Investment Income
TBIL = Tax-Basis Incurred Loss

Question 4

Tax-Basis EP formula

Answer 4

TBEP = EP + 20% x chg(UEP) = WP - 80% x chg(UEP)

Question 5

Tax-Basis IL formula

Answer 5

TBIL = PL + chg(L^D) = IL - chg(D)
PL = Paid Loss (during year)
IL = Incurred Loss (during year)
L^D = Losses after Discounting
D = Discount amount = IL - L^D

Question 6

BEAT

Answer 6

Base Erosion and Anti-Abuse Tax
New tax under the Tax Cuts and Jobs Act of 2017

Question 7

BEAT Purpose

Answer 7

Limits the ability of multinational corporations to shift profit from the US

Question 8

How does BEAT work?

Answer 8

1. Corporation calculates its regular tax (as percentage of taxable income, currently 21%)
2. Corporation calculates its alternative tax (as percentage of gross income, currently 10%)
3. If alternative tax > regular tax, then the corporation must pay the difference (BEAT = this difference)

Question 9

Conditions to be subject to BEAT

Answer 9

• insurer is part of a US group of companies with average gross receipts in the past 3 years >= $500m
• insurer makes base erosion payments >= 3% of the total deductions taken by the US group on its current tax return

If the foreign company to which tax-deductible payments have been made has elected to be taxed as a US taxpayer, then the US corporation or insurer is NOT subject to BEAT.

Question 10

Components for calculating discounted loss reserves (for tax purposes)

Answer 10

• undiscounted loss reserves
• discount rate for the AY reserves to be discounted (use US Treasury rate)
• payment pattern

Question 11

Where do you get the 3 components for discounting (for tax purposes)?

Answer 11

• undiscounted loss reserves: Schedule P, Part 1 (net of tabular discount, gross of nontabular discount)
• discount rate: based on corporate bond yield curve (determined by US Treasury for each accident year)
• payment pattern: use Schedule P, Part 1 from industry data

Question 12

Why is payment pattern derived from Schedule P, Part 1 instead of Part 3 (for tax purposes)

Answer 12

• Part 3 may be skewed because it doesn’t include adjusting/other expenses
• Part 3 is not audited (Part 1 is audited)
• Part 1 requires no judgment for the IRS method

Question 13

Considerations in allocating investments to stocks vs bonds

Answer 13

TRIV
* Tax minimization
allocate such that regular tax = AMIT
* RBC charge
stock charge > bond charge…advantage bonds
* Investment return
stock return > bond return…advantage stocks
* Volatility
stock volatility > bond volatility…advantage bonds (management prefers stability in results)