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  • April 25, 2018 4:00 PM | Vaughn Lawrence (Administrator)

    By Darren Lossia, Finys

    “The game is won or lost before it is played.” As someone who enjoys looking back and analyzing outcomes, I always liked this quote. I usually found that the source of success or failure was present and identifiable before a process got started. Luck and timing can play a role, but claim outcomes are usually determined by methods, tools, systems and the people that are in place before the claim comes in the door. I call these four categories ‘foundational factors’ that significantly influence results. Some of these factors like a legacy system and legacy procedures are inherited. Those inherited items can be advantageous or highly problematic if the organization fails to re-evaluate itself from time to time.

    Let’s get specific here. After two decades in claims management, I can safely offer three practice tips which should be considered by any claims department. All three tips are designed to have a significant impact on results.

    Tip #1 – Take a hard look at claim intake, review, and setup.  Initial claim review and setup is extremely important.  Some call it, ‘the first 48 hours” which gives it a label of urgency akin to a medical situation.  An organization cannot afford to have only unskilled people in the claim intake, review, and setup group.  But, I have seen many companies do just that.  Statistically, many claims will be of a routine nature.  Regularly, iterations of that same kind of routine claim will appear numerous times throughout the year.  But, some seemingly routine claims will contain a wrinkle and that wrinkle needs to be identified early, flagged and followed.

    Why is initial review and setup so important?  Coverage issues, important liability issues and time-sensitive opportunities that are identified and addressed quickly prevent getting stuck with unnecessary costs down the line. Further, claims adjusters and outside vendors are assigned at this phase, and they should be chosen in light of the issues identified.  If the needs of the claim are not identified and flagged up front, assigned adjusters and vendors who are often inundated with daily follow-up tasks may miss crucial opportunities to prioritize the new file.       

    What can go wrong?  An organization I consulted with paid approximately $6.4 million in preventable claim payouts over the course of 2 years.  They took these losses because of a failure to identify clear policy provisions that precluded coverage but were never raised as a defense.  Over half of the preventable loss was caused by repeated failures to understand a single definition in the insuring agreement. 

    Tip #2 – Track and understand your production ratio, but do not manage it.  Production ratio is an indicator of throughput.  It is affected by a few factors.  Production ratio is the ratio of closed files to incoming files within a given period.  The factors that affect this ratio are (1) business growth, (2) weather events giving rise to an influx of claims, (3) adjuster proficiency, (4) claims staffing and (5) cycle time which is affected by the methods, systems, tools, and vendors used.  Do not manage the production ratio, use it as an indicator.  Usually, higher is better.  But, if you begin managing the production ratio, you may create unintended consequences as adjusters make decisions that serve neither the policyholder nor the insurer.  If used as an indicator, it can help justify new hiring, the need for a change in methods and process or the need for training.  It may also be an indication that systems and methods need refining or updating.  Once these problems are identified, they must be addressed immediately.   

    What can go wrong?  File neglect.  If file counts rise and keep rising, your staff will be unable to investigate and analyze claims properly.  They will become mostly administrative and resort to superficial comments and notes that fall well short of actual analysis.  Reserve increases become increasingly untimely, and the problem feeds on itself as the backlog grows.  Rising file counts are often caused by poor handling methods where there was little investigation and analysis and insufficient training.  This leads to reluctance and inability to make difficult handling decisions.  An astute manager once commented that a slow-moving claims department would soon become a slower moving law firm.

    Tip #3 – Metrics alone, without business knowledge, can be dangerous.  To quote a world-famous management mind, W. Edwards Deming, “Nobody should try to use data unless he has collected data.”   After years in the claims and insurance business, I have noticed many problems with the use of metrics.  To use metrics properly, we have to define the question, the metric that answers the question and the explanation. 

    One of my favorite metrics for determining the value of our litigation investment is “cycle time by matter type.”  However, to properly calculate this metric, we have to define it with precision.  Measuring cycle time for litigation involves knowing Legal Services conclusion date minus Litigator Assignment date for all of your closed litigation files.  Using the more readily available “close date minus open date” is off-the-mark and unfair.  One distortion of using the “claim open date” is that the defense firm may not have received the assignment until a few months or years after the insurer opened the file.  Just the same, using “claim closed date” on the backend is also wrong.  Law firms have little control over the exact date a file is closed in the insurer system but have more control over the date their legal services concluded.  To find the date when legal services concluded, the last itemized legal bill will include a variety of dates on the last page.  Enter the date that best represents the firm’s conclusion of the matter from a substantive, rather than administrative, handling perspective. 

    Once a metric like this is determined, it is absolutely critical to review this metric in light of other metrics and more importantly, the personal knowledge and dealings one has with the attorney-service provider.  Any conclusions about what is a good or bad number are premature without context and explanation.  The context and explanations help determine if we are getting a ‘false-positive’ or a ‘false-negative’ from the metric.  To help us with the cycle time metric for law firms it is critical to analyze each firm’s corresponding “median legal spend” and corresponding “median settlement amount.”  A law firm may have a relatively high cycle time but have a low average settlement amount or an outstanding record of defense verdicts.      

    What Can Go Wrong?  Just like physicians, litigators have certain skills or specialties.  Simply because a defense firm shows strong results for employment practice cases does not mean that firm is the right pick for a closed-head injury auto negligence case.  Metrics used in combination with detailed file knowledge should guide your assignment decisions.

    Claim outcomes are not a random result of fate.  They are relatively predictable and controllable.  Once the system, tools, people, and processes are in place, it is much simpler to control outcomes and eliminate costly errors.

    This article was previously published in the PAMIC Pulse

    Darren Lossia is a PAMIC member and Director of Risk Management Services at Finys in Troy, Michigan.  He is a licensed attorney and claims professional specializing in bringing creative claims solutions to clients seeking efficiency improvements.  Darren earned a law degree from the University of Michigan, a Master’s degree in Management and a Bachelor’s degree in Economics.  Finys provides software solutions for property and casualty carriers (The Finys Suite).

  • April 25, 2018 3:30 PM | Vaughn Lawrence (Administrator)

    As the impact of cybersecurity incidents and data breaches become broader and deeper, more organizations are recognizing cyber risk as an enterprise risk and taking corresponding steps to establish appropriate oversight.

    But as corporate cybersecurity capabilities mature, how have the roles of the board, audit committee, and internal audit changed, and what can they look forward to in the future?

    According to a new survey jointly conducted by Compliance Week and Mazars USA, while organizational cybersecurity oversight capabilities are maturing, many companies still suffer from a lack of formally assigned roles and responsibilities, and a loosely defined cybersecurity framework.

    “Internal audit departments are playing an increasing role in achieving cybersecurity goals, and accomplishing them in different ways. But they need to ensure that their efforts are aligned with their companies’ overall cybersecurity oversight approach,” said Brian Browne, Principal and Cybersecurity Practice Leader at Mazars USA.

    “Overall the approach to cybersecurity oversight seems to be taking hold and maturing, but there seems to be a disconnect among the roles, especially when it comes to the three lines of cybersecurity defense,” Browne says. “It is very important to make sure that the cybersecurity conversation is happening at the board or the committee level.”

    The Three Lines of Cybersecurity Defense

    The three lines of cybersecurity defense are defined in The Institute of Internal Auditors (IIA) Global Technology Audit Guide (GTAG), “Assessing Cybersecurity Risk—Roles of the Three Lines of Defense.”

    The first line of cybersecurity defense consists of business units and cybersecurity teams that manage the processes and controls that are in place to manage cyber risks.

    The second line consists of risk managers with risk, control, and compliance oversight functions for ensuring that the first line processes and controls exist and are operating effectively.

    Internal audit acts as the third line of defense, providing senior management and the board with independent and objective assurance of the cyber risk management implemented in the first and second lines of defense.

    The Compliance Week/Mazars Cybersecurity Oversight Survey

    The survey polled more than 150 executives responsible for cybersecurity at their organization. The respondents represent a wide variety of industries, with nearly a quarter from financial services, and another 12.5 percent from insurance organizations. The majority of respondents were chief audit executives, chief information security officers, or chief compliance officers.

    Who Owns Responsibility for the Enterprise’s Cybersecurity Oversight?

    Nearly 32 percent of respondents said that their audit committee primarily owned responsibility for the enterprise’s cybersecurity oversight, followed by the technology committee (22 percent) and the risk committee (15 percent).

    Some 10 percent of respondents said cybersecurity oversight was not formally assigned anywhere within the enterprise, which Browne sees as an area of concern.

    Is Cybersecurity Discussed Regularly at Audit Committee Meetings?

    Nearly 43 percent of respondents said that cybersecurity is discussed regularly at audit committee meetings as an established agenda item, and another 36 percent said it is not an established agenda item, but it is discussed occasionally.

    This is an area where the level of dialogue can stand to improve. “More and more, the responsibility for cybersecurity oversight is falling on the audit committee,” Browne says. “It’s the right place in a lot of organizations to talk about cyber risk. While many audit committee meetings have this as a regular agenda item, we should see that continue to grow year over year.”

    Who Conducts Cybersecurity-Related Services?

    Roughly 20 percent of internal audit departments perform all of their cybersecurity-related internal audit services themselves; however, almost half (46 percent) co-source these internal audit services with an external provider.

    What drives co-sourcing, Browne says, is that it allows an organization to marry internal audit organizational knowledge with external cybersecurity expertise to provide senior management and the board with an independent assessment of the effectiveness of management activities in managing and mitigating cybersecurity risks and threats.

    Usually, companies turn to external providers because they lack the time/budget, talent, and/or tools assess their cyber risk. This is all fairly normal, Browne says, but he did find it concerning that some 27 percent of respondents said that their cybersecurity was assessed by another internal or external assurance provider (i.e., non-internal audit personnel).

    “That’s all well and good, but the role of internal audit is to be that third line of defense on cybersecurity and independently assess and report to the board on how the organization is managing its cyber risk,” Browne says. “In a way, you’re saying, ‘somebody else is doing that so we don’t have to.’ In reality internal audit should still be responsible as the third line of defense.”

    Nearly 79 percent of respondents said that their internal audit department covered cybersecurity in some way as cybersecurity was rated a high enterprise risk; some 36 per- cent also said it came by way of direct board or audit commit- tee request.

    “That’s good,” Browne says, “because the board is ultimately responsible for overall cybersecurity oversight. The fact that they are asking internal audit to do something there is a good thing. I would hope over time, that number goes even higher.”

    But when asked to what degree their organization had adopted the IIA three lines of cybersecurity defense model approximately 60 percent indicated that they have not formally defined or assigned any roles and responsibilities across the three lines.

    Nearly 21 percent of respondents were not even aware of the three lines of cybersecurity defense, which Browne said was disappointing, but not surprising, given the wider lack of formal assignment of cybersecurity roles and responsibilities.

    When asked how their internal audit department independently assesses their organization’s cybersecurity, the most common answers were:

    Assessing the cybersecurity control framework such as people, process, and technology (57 percent);

    Assessing the compliance status against one or more regulations or frameworks such as the New York Department of Financial Services (NYDFS) Cybersecurity Regulation, Health Insurance Portability and Accountability Act (HIPAA), or the European Union (EU) General Data Protection Regulation (GDPR) (44 percent); and

    Assessing a specific cybersecurity operational area such as vulnerability management, logging and monitoring, etc. (42 percent).

    Only 33 percent of respondents said they assessed asset inventories such as hardware, software, and sensitive data, which is another area Browne says should rate higher, but is not a surprising result, given what he has seen in the field.

    “Asset inventories are foundational from security perspective, to understand exactly what hardware and software you have deployed in the organization and what sensitive data you have,” Browne says. “Without that awareness, you may not be aligning your cybersecurity protection and detection mechanisms appropriately to effectively manage your risk.”

    Browne added that the defined EU GDPR data subject rights will probably drive more attention to asset inventories of personally identifiable data.

    When asked to identify their top cyber security threats, the respondents’ most common answers were phishing (63 percent), malware/crime-ware (55 percent), and third-party risk (43 percent).

    This is an opportunity for internal audit to gauge the organization’s overall risk in these areas, especially since things like phishing and malware are what Browne considers the “point of the spear” for much larger cyber security issues.

    “This is an opportunity for internal audit to ask, ‘Do we have the right protection on mechanisms at the perimeter and on user endpoints, so if they do click on a link or open an attachment, there is some countermeasure there to thwart the attack?’” Browne says.

    Third-party risk is trending upward, Browne notes, in part because regulators are paying more attention to those risks as well. “Look at the New York cybersecurity regulations,” Browne says. “Regulators are paying more attention because more and more security incidents and data breaches involve third parties. Those all align, so that’s good to see the recognition of that as a risk.”

    What Standards Do You Measure Your Cybersecurity Program Maturity?

    When it comes to measuring cyber risk programs against a maturity model, some 41 percent of respondents said they leverage the National Institute of Standards and Technology Cybersecurity Framework (NIST CSF). Other frameworks were mentioned, but none came close to the prevalence shown for the NIST CSF.

    “That is the one most people have heard of, and is familiar to them,” Browne says. “The challenge with the NIST is that it is so big, intimidating, or even onerous to implement. Organizations tracking to it need to take the time to understand and tailor that framework to their organization.”

    What is surprising, Browne said, was that 25 percent of respondents said they did not track the maturity of their cyber risk program at all. “Talking about the control frameworks that define the people, processes and technology in your organization is key to managing cyber risk on an ongoing basis,” Browne cautions. “If you do not have a framework in place, you are going to be haphazard in your approach to managing your cyber risk, and your results are going to show that.”

    Some 31 percent of respondents said they felt the overall maturity level of their cyber security efforts were “managed”—processes were monitored and performance was measured. Results steadily fell from there, with 23 percent saying their programs were defined (processes formally defined with without sophistication or monitoring), 21 percent saying their programs were repeatable (processed follow a recognizable pattern but based on intuition or individual knowledge), and 13 percent saying they were initial (processes are ad hoc and disorganized).

    Overall, this shows a trend in the right direction, Browne says, pointing out that the relatively high number of respondents reporting their programs as managed is a very good result, and higher than expected. Only 3 percent of respondents said their programs were optimized—that is, highly refined and automated—which was not a surprise, given that many organizations, once they hit the “managed” level feel they have their risk managed to within an acceptable level.

    How Much Do You Feel Your Organization Is Managing Its Cyber Risk?

    Perhaps the most telling result was from the survey’s final question, in which respondents noted how much they felt their organization was managing its cyber risk. The majority of respondents (60 percent) said they felt they were keeping up with their level of risk, while 21 percent said they were falling behind. Surprisingly, 19 percent said they were getting ahead of their cyber risk.

    “Frankly, I don’t know if I would ever feel comfortable enough to say I am ‘getting ahead’ of my cyber risk,” Browne says. “To say you’re getting ahead, you are truly identifying risks before they’re actually becoming realized. I think that’s a difficult thing to say, and having been in this field for over 25 years, I don’t know if I would ever say I was getting ahead. I am even surprised over that 60 percent of organizations are keeping up with managing their cyber risks.”


    The fact that nearly 43 percent companies discuss cybersecurity as an established agenda item audit committee meetings is promising from an oversight perspective, we should see that trend upward moving forward based on the role that many internal audit departments are playing with respect to cybersecurity.

    In addition, there is much to be gained from a fruitful partnership between internal audit and external resources when it comes to managing and assessing cyber- security, Browne says. “From an internal audit perspective, in order to function as the third line of cybersecurity defense, going through some sort of formalized risk assessment method or process to determine your cyber risk and corresponding cybersecurity related audits is really important.”

    Once those risks have been identified, Browne says, the decision of how much of the performance of those audits can be handled in-house. “The vast majority of internal audit departments need some external help when it comes to cybersecurity because it’s typically not a core skill set that they are going to maintain as part of their department. That would be the key to providing that third line of cybersecurity defense.”

    This article was previously published in the PAMIC 360.

    Mazars USA LLP provides insight and specialized skills in accounting, auditing, tax, consulting and advisory services. Since 1921, our dedicated professionals have leveraged technical industry expertise to develop customized solutions for clients, create value, and optimize their performance. As the independent U.S. member firm of Mazars Group, our global reach includes 20,000+ professionals across 86 countries. At local and global levels, we are proud of our value-added services in building lasting relationships with our clients and communities. For more information, visit us at

  • April 25, 2018 3:30 PM | Vaughn Lawrence (Administrator)

    Goodville Mutual Casualty Company has hired Bruce Brizzi as Vice President of Marketing.

    Beginning this month, Brizzi takes leadership of the Marketing Department. His predecessor Fred Macy retired from the position effective March 29 after more than 10 years filling this role.

    Brizzi has worked in the property & casualty industry for over 30 years. He most recently held the title of Executive Vice President of Insurance Operations at Northern Neck Insurance Company, serving the Commonwealth of Virginia.

    Before his time at Northern Neck, Brizzi worked for Travelers Insurance Company for 17 years, where he led claim center operations in Ohio and Pennsylvania for several years. He later transitioned into the role of Regional Vice President for Personal Insurance, responsible for production, profitability, and agency relationships.

    Bruce grew up in western Pennsylvania and earned a B.S. degree in Business Management from Clarion University of Pennsylvania.

    Goodville Mutual works through independent insurance agents in eight states, providing comprehensive property and casualty insurance products for autos, homes, businesses, churches, and farms. For more information, visit

    This article was previously featured in the PAMIC 360.

  • April 12, 2018 4:00 PM | Vaughn Lawrence (Administrator)

    By Jeremy F. Heinnickel, Esq., Saul Ewing

    The insurance industry is no stranger to collecting and analyzing data.  Long before the internet (and even computers), underwriters routinely used historical data for risk selection and pricing.  What has changed in the past several years is the dramatic increase in the amount and types of data available to insurers.  Each day, massive stores of real-time data are being created from sources like social media, internet browsing histories, mobile devices, and cloud computing platforms.  This information boom is often referred to as “big data.”   

    This large influx of data is of little use if it cannot be effectively organized and analyzed.  Analytics is often used to achieve these goals.  Data analytics is the science of drawing insights from sources of raw information.  One subset of data analytics, predictive analytics, is particularly useful for insurers.  Predictive analytics uses data, algorithms, and machine learning techniques to identify the likelihood of future outcomes based on historical data. 


    While underwriting is often cited as the main beneficiary of the big data revolution, it also has tremendous potential in claims handling and management.  Predictive analytics can be particularly helpful to claims handlers because it can assist them in identifying patterns in historical data that can be applied to current or future claims.  Identifying patterns in claims and losses can be useful in many different areas.  Below are just a few examples: 

    • Fraud Detection - Fraud detection is currently the most prevalent use of big data and analytics.  Using data analytics and artificial intelligence, an insurance carrier can more rapidly and consistently identify suspicious claims that may not have been identified by looking at a single claim file.  Potentially suspicious claims are often then referred to an insurer’s special investigations unit (SIU) for further analysis.   
    • Claims Triage / Claims Management – Resource allocation is a challenge for every claims department.  Many insurers utilize data analytics to assign scores and/or rank claims based on risk, allowing them to focus additional resources on high-risk claims.  This saves time and resources internally while increasing claim-processing efficiency to improve customer satisfaction. 
    • Setting Reserves / Settlement – Using predictive analytics, an insurer can compare factors associated with new and pending claims against those of past losses.  Analysis of the values of past claims fitting similar fact patterns can help an insurer assess the appropriate reserve and settlement values for current losses. 
    • Rapid Payment Situations - In emergency situations, insurance companies are faced with a much higher volume of claims, and often decisions on these claims need to be made quickly.  In these situations, claims are vulnerable to overpayment.  Using big data and analytics, claims handlers can more quickly evaluate claims, assess the appropriate value based on historical data, and identify potentially fraudulent claims in time-pressured situations.


    While the use of big data and data analytics in claims has great potential, there are several hurdles to overcome in implementing these tools.  One of the most significant barriers to adoption in the insurance industry is cost.  Establishing systems to collect, store, and protect data can come at a significant expense.  Larger carriers can spread the fixed costs of developing/purchasing these systems over thousands of claims.  Smaller carriers with a lower volume of claims may have more difficulty in justifying the costs. 

    The other factor that is most often cited as a barrier to innovation in the insurance industry is regulation and legal concerns.  Privacy issues are paramount any time data is being collected and used (especially from consumers).  Numerous federal laws that potentially apply to the collection, storage and use of data, including the Health Insurance Portability and Accountability Act (HIPAA), the Gramm-Leach-Bliley Act, the Children’s Online Privacy Protection Act, and the Fair Credit Reporting Act.  Many states have also adopted laws to protect privacy, with California being a leader in this area. 

    Cybersecurity is also a significant consideration for any company storing and/or transferring data. Many states have laws that establish requirements in the event of a security breach.  For example, Pennsylvania’s Breach of Personal Information Notification Act applies to any “entity that maintains, stores or manages computerized data that includes personal information” on a Pennsylvania resident and requires the collecting entity to provide notification to those residents who are affected by a security breach of the computerized data.  Furthermore, while not yet adopted in many states, the National Association of Insurance Commissioners recently adopted the Insurance Data and Security Model Law, which establishes data security standards and standards for investigation of and notification to the insurance commissioner of cybersecurity events.  A similar cybersecurity law is already in effect in New York. 

    Finally, over-reliance on data analytics and other forecasting tools can be problematic.  For example, while an automated fraud screen process may be able to identify the indication of fraud in a claim, many companies refer the claim for review by the SIU before it is denied.  As with other forecasting tools, predictive analytics indicate probabilities, not certainties.  The safest approach is to use these tools to assist but not supplant a claim handler’s thought process.

    This article was previously published in the PAMIC Pulse

    Jeremy Heinnickel is an attorney from the Harrisburg office of Saul Ewing Arnstein & Lehr LLP.  He devotes his entire practice to advising insurance companies and producers.  He has extensive experience counseling insurance clients on regulatory, corporate, and transactional matters.  He also litigates insurance-related cases in state and federal courts, and before regulatory agencies.  Over the past several years, he has focused on the impact of technology on the insurance industry, and particularly InsurTech. 

  • April 12, 2018 3:30 PM | Vaughn Lawrence (Administrator)

    Good news related to numerous pieces of legislation that PAMIC has been instrumental in driving to the finish line.  The PA House of Representatives dealt with numerous insurance-related Bills.

    HB 1851 Amends Insurance Dept. Act re financial exams Pickett, Tina Apr 9, 2018 - H-Laid out for discussion Apr 9, 2018 - H-Third consideration Apr 9, 2018   This bill includes PAMIC’s transparency initiatives related to the PID’s use of outside consultants and a broader industry initiative to put procedures and requirements in place when the PID is conducting both financial and market conduct exams.  A companion bill in the Senate recently passed with a unanimous vote as well.  The two bills will go to a Conference Committee for final consideration before going to the Governor for signature. H-Final Passage by a vote of 194 YEAS 0 NAYS 

    The following two Bills work together to eliminate the long-standing prohibition on producers giving rebates and inducements to their clients. They allow up to $100 in value per customer.

    SB 877 Amends Insurance Department Act re rebates White, Donald Apr 9, 2018 - H-Laid out for discussion Apr 9, 2018 - H-Third consideration Apr 9, 2018 -A companion bill in the Senate recently passed with a unanimous vote as well.  The bill will go to a Conference Committee for final consideration before going to the Governor signature. H-Final Passage by a vote of 195 YEAS 0 NAYS 

    SB 878 Amends Insurance Company Law re rebates White, Donald Apr 9, 2018 - H-Laid out for discussion Apr 9, 2018 - H-Third consideration Apr 9, 2018 -A companion bill in the Senate recently passed with a unanimous vote as well.  The bill will go to a Conference Committee for final consideration before going to the Governor for signature H-Final Passage by a vote of 191 YEAS 2 NAYS

    The following bills create new limited lines licenses allowing consumers to purchase self-service storage insurance and travel insurance at the business location.  Both these bills passed the Senate unanimously with a high likelihood of passing the House this week as well.

    HB 504 Amends The Insurance Dept. Act re storage Charlton, Alexan Apr 9, 2018 - H-First consideration Apr 9, 2018 - H-Laid on the table

    SB 630 Act re limited lines travel insurance Reschenthaler, G Apr 9, 2018 - H-First consideration Apr 9, 2018 - H-Laid on the table

    This article was previously published in the PAMIC 360

  • April 12, 2018 3:30 PM | Vaughn Lawrence (Administrator)

    By Thomas Barber, Steven Greene, Jay Wang and Erin Schatzle of Mazars

    The TCJA contains substantial changes to the international taxation principles currently in effect, bringing the US closer to a territorial-based regime and curtailing the ability to defer tax on foreign source income. Insurers need to pay particular attention to these provisions if they are part of a global organization having intercompany charges and ceded reinsurance transactions.

    Deemed Repatriation of Deferred Foreign Income

    The TCJA moves the United States from a worldwide tax system to a participation exemption system by providing corporations a 100% dividends received deduction for dividends distributed by a controlled foreign corporation (CFC). To accomplish this transition generally requires that, for the last taxable year of a foreign corporation beginning before January 1, 2018 all US shareholders of any CFC or other foreign corporation that is at least 10-percent US-owned but not controlled (other than a PFIC), must include in income their pro rata shares of the accumulated post-1986 deferred foreign income that was not previously taxed. Income inclusion is to be taxed (a Transition tax) at a 15.5% rate on accumulated post-1986 foreign earnings held in the form of cash or cash equivalents, and 8% rate on all other earnings. To accomplish this, the TCJA permits a deduction in an amount necessary to result in a 15.5% tax on foreign earnings held in cash or cash equivalents, and an 8% tax on foreign earnings held in illiquid assets.

    The TCJA allows a US shareholder to elect to pay the transition tax over eight years at 8% for the first five years, 15% in the sixth year, 20% in the seventh year and 25% in the eighth year.

    Mazars Insight: We strongly suggest the performance of earnings and profits studies related to any relevant specified foreign corporations to accurately determine accumulated post-1986 deferred foreign income that would be subject to the transition tax. Companies utilizing net operating loss carry forwards in 2017 should consider not electing the eight year spread of transition tax.

    Companies’ 2017 year-end tax provisions need to consider this as the tax is a 2017 event. Also, if a company has made the assertion that their investment in the applicable foreign subsidiary is not being permanently reinvested, the taxable income recognized under this provision would be an increase in its tax basis in the foreign subsidiary and as such would be treated as a temporary tax difference subject to deferred tax. Otherwise, the increase in taxable income is a permanent tax adjustment.

    Deduction for Foreign Source Portion of Dividends Received

    The TCJA provides a 100% dividends received deduction in relation to the foreign portion of dividends received by US C-Corporation shareholders from 10% owned foreign subsidiaries. Additional features of this provision include: 

    • No foreign tax credit is permitted with respect for qualifying dividends;
    • Hybrid dividends are not subject to the deduction;
    • Dividends from Passive Foreign Investment Companies will not be eligible for the deduction;
    • Dividends received by a domestic corporation from a specified foreign corporation via a partnership are eligible for the deduction provided certain requirements are met;
    • Dividends received by CFCs from specified foreign corporations that are treated as subpart F income may also qualify for the deduction; and
    • US shareholders must satisfy a holding period requirement of more than 365 days during the 731 day period that begins on the day that is 365 days before the ex-dividend date.

    Mazars Insight: While the participation exemption brings the US closer to a territorial tax system, at least with respect to the earnings of foreign corporations, it is worth noting that Subpart F is still very much alive, and further, the bill introduces additional current tax on certain types of foreign income, described in more detail below. The overall effect is to reduce tax deferral on foreign income while modestly expanding the base. 

    New Base Erosion and Anti-Abuse Tax

    The TCJA introduces a base erosion and anti-abuse tax (“BEAT”) which essentially operates as a minimum tax applicable to taxpayers that are subject to US net income tax, have average annual gross receipts equal to or exceeding $500 million (over a three year period ending with the preceding tax year), and have paid or accrued certain related party deductible amounts included in regular taxable income (i.e., base erosion payments). Note that the gross receipts test is based on controlled group rules which would require inclusion of foreign members of the controlled group, but only to the extent the foreign members’ gross receipts relate to effectively connected income (“ECI”). For insurance companies, premiums paid for gross premiums written on insurance contracts during the taxable year are also considered base erosion payments. These taxpayers will incur the BEAT tax if it exceeds their regular tax.

    This minimum tax equals the excess of 10% (25% for tax years beginning after December 31, 2025) of a taxpayer’s “modified taxable income” for a tax year over the taxpayer’s regular tax liability for the tax year, with an allowance for certain credits under Chapter 1 of the Code. Modified taxable income is calculated by adding back certain deductions attributable to payments to related foreign companies and related NOLs. There are certain exceptions to the BEAT tax for small tax paying groups (i.e., taxpayers with a base erosion percentage of less than 3% for the tax year, or 2% for certain banks and securities dealers), as well as, certain types of payments excluded from the definition of what constitutes base erosion payments. Unlike the repealed AMT regime, any BEAT in excess of regular tax will not be creditable in the future.

     Mazars Insight: Here is where we really see Subpart F remnants in the US taxation system, albeit at a reduced rate. However, there is still quite a bit undefined in this provision. For example, is the $500 million gross receipts test on gross of ceded reinsurance earned or written? Can ceded loss and claim reimbursements be netted from the ceded premium that’s treated as a base erosion payment? Insurers have already begun to evaluate and change their ceded reinsurance agreements in order to minimize the impacts of the BEAT. Taxpayers should begin to model projections on a regular tax and on a BEAT basis in order to determine where the breakeven point is. If taxpayers have any latitude on business income/expenses and/or timing of adjustments to taxable income (e.g., bonus depreciation), permanent tax savings may be available to them. We expect the Treasury Department to prescribe regulations as appropriate to define, with more granularity, the nature of how to calculate adjustments to modified taxable income, particularly with respect to certain industries like insurance. We also expect an explicit anti-abuse provision preventing planning to circumvent BEAT. 

    On January 10th the FASB in Staff Q&A TOPIC 740, NO. 4 ACCOUNTING FOR THE BASE EROSION ANTI-ABUSE TAX indicated that the BEAT is to be treated as a period cost and that deferred tax assets and deferred tax liabilities should be recorded at the regular rate. We would suspect that Statutory Accounting rules under SSAP No. 101 would follow the lead of the FASB on this issue.

    Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income

    The TCJA permits intangible income from Foreign-Derived Intangible Income (“FDII”) to be taxed at 13.125% (the effective tax rate of 13.125% is arrived at by computing a FDII deduction). The FDII deduction can only be made if the income derived is not from a low-taxed jurisdiction.

    US shareholders of CFCs are required to include in income their “global intangible low-taxed income” (“GILTI”). The mechanism for taxing such amounts would be similar to Subpart F. That is, a shareholder’s GILTI, generally equal to the excess of the shareholder’s CFC net income over a routine or ordinary return would be currently taxable and subsequently increase the shareholder’s basis in its CFC stock.

    Mazars Insight: As a result of the deduction available to corporate shareholders equal to 50% of the GILTI through 2025, US shareholders will be taxed at an effective rate of 10.5% on these amounts irrespective of whether any amounts are distributed. The GILTI provision effectively increases the type of earnings subject to immediate taxation under Subpart F, indicating potential concern that the move toward a territorial system could result in profits permanently shifted offshore.

    This article was featured in the PAMIC 360.

    Mazars USA LLP provides insight and specialized skills in accounting, auditing, tax, consulting and advisory services. Since 1921, our dedicated professionals have leveraged technical industry expertise to develop customized solutions for clients, create value, and optimize their performance. As the independent U.S. member firm of Mazars Group, our global reach includes 20,000+ professionals across 86 countries. At local and global levels, we are proud of our value-added services in building lasting relationships with our clients and communities. For more information, visit us at

  • March 28, 2018 4:00 PM | Vaughn Lawrence (Administrator)

    Congratulations to newly minted Insurance Commissioner, Jessica Altman. On March 20, the PA Senate confirmed Insurance Commissioner Jessica Altman by a 50-0 vote.

    In her confirmation hearing before the Senate Banking & Insurance Committee, Insurance Commissioner Altman touched on some topics, some of which included:

    • Drug Formularies for Workers’ Compensation as a means of reducing opioid abuse: Altman stated her support for formularies as a care management tool but also cautioned that some individuals face special situations which warrant processes to curb unnecessary opioid use but which don’t discourage necessary use.
    • Use of medical marijuana and insurance law: Altman said that much of the answer to that question lies outside of the purview of the Insurance Department now but that there needs to be a better understanding of its implications for liability insurance.
    • Private Flood Insurance: Altman pointed to Federal changes in the NFIP (re-mapping) which reclassified property locations into higher risk flood zones requiring the insurance and making the product unaffordable to many. This cost has provided an opening for private sector Flood Insurance which contains a surplus lines alternative to NFIP. She did say that the Department was not telling carriers to offer Flood Insurance.

    You can read Commissioner Altman’s testimony here:  Testimony

    You can see Commissioner Altman’s full presentation here:  Full Presentation

    This article was featured in the PAMIC 360

  • March 28, 2018 3:30 PM | Vaughn Lawrence (Administrator)

    By Michael Dubin, Baker Tilly

    The history of professional employer organizations’ (PEO) involvement in workers compensation has been fraught with bad actor scams and insurance company insolvencies. Now, through the rise of technology and the prevalence of PEOs in the workers compensation market, companies may see truly useful transformation within traditional workers compensation models.

    PEOs and Workers Compensation Insurance Regulation

    Ever since the creation of workers compensation insurance more than 100 years ago, nearly every employee in the United States has been insured for workers compensation through a policy issued to the employer by a regulated insurance company; the amount charged for that coverage has also been regulated. Due to the perceived randomness and long-tail nature of workers compensation claims, as well as the small sample size of any individual employer, state mandated rates for each employer were based solely on the employer’s industry classification. The rigid assumption that the amount of claims incurred by an individual employer does not impact rates has become relaxed throughout the years due to the regulatory approval of experience rating, retrospective rating and large deductibles. Currently, there is much variation in regulated rates within employer classification codes, but the regulated rates still do not reflect all differences in expected losses. Through increased use of self-insurance (e.g., large deductibles), many employers are now able to retain more workers compensation risk than what was possible in the early years of workers compensation.

    History of PEOs

    PEOs are organizations that assist their clients with human resources and employee benefits, including workers compensation insurance. These institutions assist with workers compensation by taking responsibility for their clients’ obligations to provide this type of insurance, essentially becoming the statutory employer (see chart below). The term PEO, however, did not always exist. Initially, staffing agencies realized they could buy workers compensation insurance based on the staffing agency employer classification code, even if their employees were staffed in an industry with higher risks. These so-called temporary staffing, or employee leasing agencies, sold their services on the basis of being able to pass through a much reduced workers compensation cost to their clients. Despite the lower rates the staffing agencies were continuing to pay, their policies were covering the operations of their new higher risk clients. As a result, the mandatory rates were inadequate and a regulated workers compensation insurer was footing the bill.

    As these early PEOs flourished and grew, insurer insolvencies resulted. There were many loopholes in the rate regulation system, bad actors in the PEO industry and an overall resistance to being classified as something other than a standard temporary employment agency. All of these factors allowed this behavior to continue for many years before insurance regulation caught up.

    Initially there was no consensus on what to call agencies that took responsibility for their client’s workers compensation risks. However, the term PEO began being used in 1994 when the National Staff Leasing Association changed its name to the National Association of Professional Employer Organizations. In most jurisdictions today, there is a consensus about which companies are PEOs and what workers compensation regulations apply to them.

    Today’s PEOs Retain Workers Compensation Risk

    In this day and age, insurance carriers are more cognizant of the dangers presented by PEOs. In addition, the underlying exposure of PEOs’ employees are subject to much greater shifts than a typical employer and there is no way in the regulated system for rates to adjust appropriately and quickly. As a result, these organizations have been forced to retain a large portion of the workers compensation risk themselves. Since workers compensation risk can be very material for a PEO, they must also be vigilant about underwriting, pricing and loss control in order to thrive.

    Two Types of PEO Clients

    When it comes to workers compensation, there are two distinct types of PEO clients that are broadly characterized as “white collar” and “blue collar.”

    White collar clients are those with no risk of occupational accident other than office work. While large worker compensation claims can still occur (e.g., automobile, terrorism, ergonomics, natural catastrophes, vacation type activities, etc.), the costs of occupational accident risk is negligible compared to other employee benefits services provided by PEOs for these clients.

    Blue collar clients, on the other hand, include restaurant, nursing home, manufacturing, logistics, construction and other types of industries where employees are subject to the risk of accident due to their occupation. For blue collar clients, workers compensation costs are a significant portion of total employee benefits costs. When referencing workers compensation in the PEO environment, blue collar PEO clients are primarily being discussed since workers compensation costs are material for blue collar clients.

    InsurTech and PEOs

    New technologies have transformed industries (e.g., Uber with the taxi industry, Airbnb with the hospitality industry, etc.) and are altering the insurance industry. Insurers have lagged other industries in this technological progress due to complicated regulations. While many insurance companies are investing heavily in InsurTech, there is not as much investment in InsurTech for the workers compensation segment.

    There are three possible reasons why InsurTech is more prevalent in personal and other commercial lines than workers compensation: the long-tail, the variety of industries and prior experience.

    Long-tail: It may take years to settle all claims and know the financial results of pricing and underwriting decisions. Due to ambiguous results early on, there is increased difficulty in confirming with data that InsurTech is improving underwriting and pricing.

    Variety of industries: There are a wide variety of workers compensation risks – from a truck driver to a coal miner to a carpenter to an architect. Personal automobile insurance, on the other hand, covers millions of people with very similar driving risks. The law of large numbers that works well in automobile insurance is difficult to apply in workers compensation.

    Prior experience: The history of new entrants into the workers compensation market is fraught with situations where a lack of expertise is perceived to have led to poor results. For example, in the 1990s, life insurers looking for investment returns had poor results when insuring a “carved out” portion of workers compensation which led to nearly $2 billion in potential losses. For the last several years, life insurers have had low investment returns and have been looking for new investments to, once again, improve their investment returns. However, life insurance investment in PEOs currently seems to have the potential to offset low investment returns.

    By digging deeper, PEOs have the potential to transform workers compensation insurance and lead to improvements in three areas: risk control, underwriting and pricing. This transformation is possible because PEOs already have significant market share and the PEO companies already consider themselves technology companies. In addition to being technology companies, PEOs take on the workers compensation risks of their blue collar clients. While these organizations are not insurance companies, the risk they are taking is precisely workers compensation insurance risk. Since PEOs are technology companies which derive material revenue from taking insurance-type risk, they should be considered InsurTech.

    The future of PEOs and InsurTech

    The potential benefits InsurTech can bring to any line of insurance are lower expenses and increased profitability (e.g., risk control, underwriting and pricing). Since PEOs have more access to employer data and worksites than insurance companies, big data and technology could potentially be used more effectively by PEOs to develop InsurTech solutions. The path may be similar to technological transformations currently being seen in automobile insurance since driving exposure is a major portion of workers compensation exposure and the risks of operating heavy machinery have parallels with driving as well.

    Currently, workers compensation insurers are barely scratching the surface of InsurTech with technology to improve underwriting results. Since any changes to underwriting and pricing procedures of workers compensation need to be approved by a regulator, insurers have little incentive to implement advancements that are expected to meet regulatory scrutiny. Compared with the relationship between the workers compensation insurer and employer, the relationship between the PEO and its clients is relatively unregulated. In this instance, the PEO is free to charge its clients any amount for a bundle of services which include workers compensation coverage. Since the rate it charges its customers for workers compensation is unregulated, this opens the door for the PEO to review new sources of data, greatly increase the number of risk classifications and increase the frequency of rate changes. To blaze the trail leading technology into workers compensation while avoiding the pitfalls encountered by past new entrants into the workers compensation insurance space, PEOs must utilize top-notch underwriting, pricing and actuarial expertise.

    This article was featured in the PAMIC 360


    1. The Wikipedia entry on professional employer organizations has a section on abuses.
    2. For example, in 2015, the Missouri Department of Insurance placed Lumberman’s Underwriting Alliance into receivership when its largest PEO client failed to fund its collateral after filing for Chapter 11.
    3. “Insurers, reinsurers investing in InsurTech”, Business Insurance, February 1, 2018
    4. According to Investopedia, InsurTech refers to the use of technology innovations designed to squeeze out savings and efficiency from the current insurance industry model.
    5. “Life after Unicover”, Best’s Review, July 1, 2001

    Michael Dubin joined Baker Tilly in 2017 as a member of the financial services practice group and the firm’s director of actuarial services. Mike delivers forward-thinking solutions to help clients drive growth, generate revenue, ensure regulatory compliance and achieve significant financial savings.

  • March 28, 2018 3:30 PM | Vaughn Lawrence (Administrator)

    By Thomas Barber, Steven Greene, Jay Wang and Erin Schatzle of Mazars

    The TCJA contains some relatively substantial changes to the property and casualty tax provisions in effect as of December 31, 2017. These changes were necessary for simplification as well as the industry’s contribution to budget reconciliation for ultimate passage of the bill into law. Insurers need to pay particular attention to these provisions as they are an integral part of property and casualty insurers’ taxation going forward.

    Loss Reserve Discounting

    The TCJA modifies the computation of tax basis discounted unpaid loss reserves under section 846 in the following ways:

    The interest rate used to calculate the applicable accident year discount factors is modified from the 60-month rolling average of the applicable federal mid-term interest rate (AFR) to an interest rate based on the corporate bond yield curve for the preceding 60-month period on investment grade corporate bonds. The monthly interest rate used to set the pre-2018 law discount factors, as published in Revenue Procedure 2018-13, was 1.46% as compared to an estimated corporate bond yield of that could be approximately 3.5%.

    The applicable loss payment patterns for long tail lines of business are extended to a maximum of 24 years, rather than 15 years. However, the length of the payment pattern for short tail lines remains at 3 years.

    Repeal of the section 846(e) company pay pattern election which allowed an insurer to use its own historical payment patterns for discounting unpaid losses. Generally, this provision was beneficial for taxpayers that paid claims more quickly than the industry average.

    These provisions apply to taxable years beginning after December 31, 2017. For the first taxable year beginning after December 31, 2017, the difference in the amount of the tax basis discounted unpaid loss reserves at December 31, 2017 and the amount of such tax basis discounted unpaid loss reserves, determined as if the new tax law had applied for that year, is treated as a transition adjustment. This transition adjustment is brought into taxable income on a straight-line basis over eight years beginning in 2018.

    Mazars Insight: Generally, the modifications increase the effect of the time value of money applied to insurers’ loss reserve tax deduction by increasing the interest rate used to determine the loss reserve discount factors and extending the period over which to recover loss reserves. Insurers will need to wait for the IRS to issue new discount factor tables for all pre-2018 accident years in order for them to determine the transition adjustment.

    While the TCJA is silent on the discounting of accrued salvage and subrogation recoveries, given that the interest rate was identical to the rate used for unpaid loss reserves, it is likely that the Treasury will issue guidance modifying the determination of discounted salvage and subrogation on terms similar to unpaid loss reserves.

    In general, the provision is expected to lower the amount of tax basis discounted unpaid loss reserves; accordingly, current taxable income after 2017 and the existing deductible temporary difference (including the effect of the transition adjustment) at January 1, 2018 are expected to increase. As the enactment date of this provision was in 2017, insurers should report the impact in their 2017 financial statements, meaning their DTA should increase by their tax basis discounted unpaid loss reserves with a like increase in their DTL for the transition adjustment. From a practical point of view, until the IRS issues new discount factors under the TCJA, this computation cannot be performed as of the date of this article. However, note that under statutory accounting, entities have the option of recognizing the DTA and DTL within each grouping on a net or gross basis (see SSAP No.101, Q&A 2.9). Regardless of which method an entity elects (gross or net), it is crucial that consistency is maintained within each grouping from period to period. If this is done, companies will need to revisit their reversal patterns of the loss reserve discount for the SSAP No. 101 admissibility test and determine their ability to offset the DTL created for the transition adjustment beyond three years from the end of their financial statement year-ends. 


    Under pre-TCJA law, the calculation of the tax-deductible reserves for losses incurred for property and casualty insurance companies was reduced by 15% (proration percentage) of tax-exempt interest and the Dividends Received Deduction; which is treated as a reduction of a deduction (to losses incurred). The TCJA increases the proration percentage to 25%, which roughly estimates existing law after-tax impact. This provision applies to taxable years beginning after December 31, 2017. As such, it does not have an enactment date impact.

    Mazars Insight: The actual language does not specifically state the proration percentage as 25% but rather the “applicable percentage is 5.25% divided by the highest rate in effect under section 11(b). This has an effect of keeping the prior law net effective tax rates the same no matter what the statutory tax rate. The prior law’s net effective tax rate of proration is 5.25%. Thus, with the statutory corporate tax rate reduced to 21%, this then drove the proration percentage increase to 25% (5.25%/21% - the new highest corporate tax rate). Note that the statute is worded such that if the maximum corporate rate changes, the proration adjustment percentage will change accordingly, based on this formula. Insurance company investment managers will need to re-evaluate the after tax yield between taxable and tax-exempt investments as the after tax yield spread between taxable and tax-exempt investments has narrowed.

    Special Estimated Tax Payments (“SETP)

    Under pre-TCJA law, P&C insurers were allowed to offset the impact of loss reserve discounting by designating an additional special deduction and the related special estimated tax payments. The designation did not impact the cash paid to the IRS, only the calculation of taxable income. Generally, the SETPs were treated as current year tax payments. Due to the TCJA’s repeal of this special rule, any existing balance in the special deduction account at December 31, 2017 is included in taxable income with any remaining SETPs applied against the amount of additional tax attributable to the additional taxable income.

    Mazars Insight: Depending on the specific taxpayer situation, the additional tax due as a result of the reversing special deductions would be offset by application of the special estimated tax payments. Any excess tax payments will be treated as payments under section 6655. It should be noted that the application of such tax payments could result in a tax refund. As such, a current tax recoverable should be recognized for this amount.

    This article was featured in the PAMIC 360

    Mazars USA LLP provides insight and specialized skills in accounting, auditing, tax, consulting and advisory services. Since 1921, our dedicated professionals have leveraged technical industry expertise to develop customized solutions for clients, create value, and optimize their performance. As the independent U.S. member firm of Mazars Group, our global reach includes 20,000+ professionals across 86 countries. At local and global levels, we are proud of our value-added services in building lasting relationships with our clients and communities. For more information, visit us at

  • March 14, 2018 4:30 PM | Vaughn Lawrence (Administrator)

    By Thomas Barber, Steven Greene, Jay Wang and Erin Schatzle of Mazars

    The passage of the Tax Cuts and Jobs Act, (“TCJA”) on December 22, 2017 had significant impacts on the insurance industry, both domestic insurers and multi-nationals. With this in mind we address how provisions will impact insurers today and in the future, and how it will impact insurers’ GAAP and Statutory financial statements for the December 31, 2017 year-end and going forward.  Many areas of the TCJA need further clarification, and we will monitor future guidance, rulings and regulations and advise appropriately. This article represents the first of a three part series which will eventually cover the impacts on P&C Companies and International Provisions.

    Corporate Provisions

    The TCJA contains several changes to general corporate taxation rules that will also the insurance industry companies. Insurers will need to pay attention to these changes as several long standing and commonly accepted provisions have been amended. 

    Reduced Corporate Tax Rate

    Under the old law, corporations were subject to graduated tax rates of 15%, 25%, 34% or 35% depending on their taxable income. For tax years beginning after December 31, 2017, the TCJA amended the corporate rate to a flat 21% across all taxable income levels. 

    Mazars Insight: Overall, this is seen as a beneficial change for corporations in the higher income brackets. More dollars in the business’s budget can lead to increased investment and job growth. 

    Due to the law’s enactment in 2017, insurers will need to take the tax rate change into account when preparing their 2017 Statutory and GAAP tax provisions as any deferred tax assets and liabilities will reverse at the lower tax rate. The reduced rate will significantly reduce the value of deferred tax assets (“DTA”) on the balance sheet (notably those with sizeable net operating loss carryforwards and insurance reserves) and cause an increase in the amount of deferred tax expense that must be reported for 2017. Conversely, the reduced rate will significantly reduce the future deferred tax liabilities (“DTL”) on the balance sheet (such as companies with unrealized portfolio gains) and cause a decrease in the amount of deferred tax expense that must be reported for 2017. 

    Under current GAAP guidance, the difference between the DTA and DTL previously measured at the 35/ 34% tax rate and the DTAs and DTLs re-valued at the 21% tax rate will have to be reflected through the current year income statement, even for deferred tax items reflected through Other Comprehensive income (“OCI”) items. However, February 14, 2018, the FASB issued ASU No. 2018-2 (the “ASU”) which allows companies the ability to reclassify to retained earnings of tax effects of items remaining within accumulated OCI resulting from the TCJA. This would alleviate the potential effects of previously established deferred taxes on unrealized gains/losses at the old 35/34% rate while reversals are occurring at the lower 21%, thus “stranding” deferred taxes in OCI. The update would be limited in scope specifically to the TCJA. The ASU is effective fir periods beginning after December 15, 2018, but early adoption is permitted, so companies can make this reclassification in their 2017 GAAP financial statements along with appropriate disclosures.

    Under current statutory accounting guidance (see SAPWG INT 18-01), the difference between the DTAs and DTLs previously measured at the 35/34% tax rate and the DTAs and DTLs re-valued at the 21% tax rate is recorded differently than GAAP treatment. This gross change in net deferred tax, excluding any change reflected in unrealized capital gains, and excluding any change in nonadmitted DTAs is to be reflected in the “Change in Deferred Income Tax” line in changes in capital and surplus. Tax effects previously reflected in unrealized capital gains (to present unrealized gains (losses) as “net of tax” shall be updated in the “Change in Net Unrealized Capital Gains (Losses) less Capital Gains Tax” line in changes in capital and surplus. Also, future tax rates in the second prong of the admissibility test will need to be revised accordingly.

    AMT Repealed and AMT Credit Refundable

    The TCJA repealed the Alternative Minimum Tax (“AMT”) for years beginning after December 31, 2017. For tax years beginning after 2017 and before 2022, any AMT credit carry forward balances at December 31, 2017 can offset regular tax, and any remaining unused AMT credits are refundable at 50% of the amount remaining each year to the extent they exceed regular tax through 2020, with any remaining AMT credit refunded in 2021. 

    Mazars Insight: Both the repeal of the AMT and the refund of the AMT credits cause cash back in the corporation’s budget, leading to greater investments. Generally, refundable credits would not create a carry forward scenario and thus not be subject to section 383 limitation. However, it should be noted that there is uncertainty as to whether AMT credit carry forwards that are now refundable by statute are subject to past section 383 limitations or future section 383 limitations based on post-2017 ownership changes and, if so, how a taxpayer should calculate the refunded amounts by year. 

    Because any available AMT credits are fully refundable, insurers will need to recognize this gross DTA in their STAT and GAAP provisions if previously it was subject to a full or partial valuation allowance as it is guaranteed to be utilized and/or refunded no later than 2021. As a dollar for dollar credit, the AMT credit is not impacted by the change in corporate tax rates. For insurers with AMT credits in their DTAs, even if they no longer need a valuation allowance for STAT purposes they will need to consider the favorable impact it will likely have in the admissibility test under SSAP 101 paragraph order to understand the true surplus impact.

    Net Operating Loss Changes

    Under previous law, corporations were allowed to carry back 100% of any net operating losses (“NOL”) for two years and carry them forward for 20 years. For tax years beginning after December 31, 2017, the TCJA repeals the two year carryback for regular corporations (which will now also apply to life insurers) and limits the NOL deduction each year to 80% of taxable income. Any remaining NOLs can be carried forward indefinitely. Losses that were generated before January 1, 2018 are grandfathered in under the old NOL regime and, as such, are not subject to the 80% restriction.

    It should be noted that for property and casualty (“P&C”) insurance companies, the old rules still apply (i.e., P&C companies are still allowed the two year carryback and a 20 year carry forward of NOLs, which can still be applied to 100% of taxable income, even for post 2017 NOLs). 

    Mazars Insight: The loss of the ability to carryback current year losses, starting in 2018, to recoup prior year taxes paid could be detrimental to some corporations. The ability to carry forward the losses indefinitely is a benefit as corporations no longer need to worry about expiring NOLs. Separate tracing of NOLs for pre and post 2017 TCJA changes as well as for consolidated tax groups with both life and non-life insurance companies will be necessary. Additionally, insurers in a consolidated group containing P&C Insurers and non-insurance companies will need to track their future NOLs separately due to the differing carryback/carryforward regimes along with limitations that apply to non-insurers could be absorbed by non-limited P&C insurance companies’ losses. Could there be bumping rules akin to the existing life/non-life rules that remain unchanged by the TCJA, only time will tell.

    The loss of carryback ability for future NOLs and indefinite carryforward of NOLs may require valuation allowances and DTAs to be revalued, but this should be determined on a case by case basis. For P&C insurance companies, the admissibility test pursuant to SSAP 101, paragraph 11 would remain unchanged; however, life insurance companies will have to immediately adjust the admissibility test to account for the loss of carryback ability (i.e. paragraph 11 a would no longer be applicable to life insurers) in their 2017 statutory admissibility test.

    Limitations on the Deductions of Business Interest

    For tax years beginning after December 31, 2017, the TCJA limits the deduction of net interest expense to 30% of adjusted taxable income. For tax years beginning after December 31, 2017 and before January 1, 2022, adjusted taxable income is determined without the deductions for depreciation, amortization or depletion. Any business interest disallowed as a deduction can be carried forward indefinitely. There is an exemption from these rules for taxpayers with average annual gross receipts for the three year tax period ending with the prior tax year that do not exceed $25 million. 

    Mazars Insight: Because the TCJA limits how much interest a corporation can deduct in a given year, companies will need to account for this as a DTA similar to NOLs. As insurers typically have sizable investment portfolios, since the limitation is based off of net interest expense, we believe that this will not likely impact most insurers.

    Cost Recovery/Depreciation

    Section 179 - For tax year 2018, the TCJA increased the maximum amount a taxpayer may expense under Section 179 from $500,000 to $1 million. The phase-out threshold was also increased to $2.5 million. For years beginning after December 31, 2018, the maximum amount will be adjusted for inflation. As before, Section 179 expensing is limited to taxable income in a given tax year.

    Bonus Depreciation - For property placed in service after September 27, 2017 and before January 1, 2023, the TCJA increased the amount of first year depreciation to 100% from 50% as allowed under the prior law. Unlike the old bonus depreciation rules which limited first year expensing to only new assets, the TCJA allows additional first year depreciation for new and used assets (restrictions do apply). For tax years after December 31, 2022, the bonus depreciation deduction will phase down 20% each year until 2026 when it will be completely eliminated.

    Mazars Insight: The changes to depreciation expensing rules are very beneficial to corporations, as they will be able to get the deduction for capitalized fixed assets in the tax year they outlay the cash. This may lead to companies making a greater investment in capitalized assets in the years where full expensing is in place. Although insurers are typically not capital intensive, this could very well impact pass-through income related to partnership investments that have capital intensive aspects.

    The increased deduction for fixed assets could potentially put a corporation into a DTL position. As with any tax accounting adjustment for depreciation, careful tracking will need to be done for the STAT/GAAP/Tax differences to properly determine the correct DTA or DTL.

    Dividends Received Deductions

    In general, for corporate shareholders receiving a dividend from certain domestic corporations, the TCJA reduces the dividends received deduction (“DRD”) for the 70% and 80% brackets, to 50% and 65%, respectively. The 100% DRD remains intact for dividends from affiliated group members. The DRD provision is effective for tax years beginning after December 31, 2017. 

    Mazars Insight: Taking into account the drop in the corporate tax rate, the change in the proration provisions of the TCJA, and the drop in the DRD percentages, the effective tax rate for P&C insurers on greater than 20% owned stock drops from 11.2% to 10.7625% and less than 20% owned stock from 14.175% to 13.125%. 

    This article was previously published in the PAMIC 360.

    Mazars USA LLP provides insight and specialized skills in accounting, auditing, tax, consulting and advisory services. Since 1921, our dedicated professionals have leveraged technical industry expertise to develop customized solutions for clients, create value, and optimize their performance. As the independent U.S. member firm of Mazars Group, our global reach includes 20,000+ professionals across 86 countries. At local and global levels, we are proud of our value-added services in building lasting relationships with our clients and communities. For more information, visit us at

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