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Tax Reform's Impact on Reinsurance Could Affect Insurer Rating Treatment

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February 09, 2018

A.M. Best has observed that anticipated structural changes to certain reinsurance arrangements between affiliated insurance or reinsurance companies, prompted by the recent US tax reform law's enactment, could impact the rating agency's assessment of group rating affiliations.

A.M. Best's "rating unit" concept in evaluating insurance group members recognizes that the financial fortunes of certain members may be so entwined that they are most appropriately analyzed with their group as a whole. An affiliate of a lead rating unit that carries a group rating affiliation is important to the overall group's primary mission based on its financial, operational, or strategic importance.

According to a new Best's Briefing, Impact of US Tax Reform on Group Rating Affiliations, A.M. Best expects its rated US-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 antiabuse tax measure. These contracts, considered explicit support under Best's Credit Rating Methodology, are considered in A.M. Best's assessment of group rating affiliations.

Material changes to a reinsurance agreement, or outright nonrenewal, for any reason, could affect A.M. Best's assessment of whether a parent is willing and able to provide explicit support to an affiliate. However, explicit support is 1 of 10 qualitative and quantitative factors used to assess group rating affiliation eligibility, and A.M. Best will consider all of these, including all forms of explicit support, on a situational basis.

A.M. Best expects tax reform to be a net positive for the financial position of US property and casualty insurance companies and US-parented global insurers and reinsurers. The largest benefit will be the reduction in the corporate tax rate; however, other tax reform provisions may limit the benefit of the reduction. 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.

Registration is required to access a copy of the briefing from A.M. Best.

Copyright © 2018 A.M. Best Company, Inc. and/or its affiliates ALL RIGHTS RESERVED

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