active participation in meeting

For the insurance industry, 2023 was a tumultuous year riddled with challenges and unpredictability, including staffing shortages, inflation, severe weather and cybersecurity woes. During Baker Tilly’s annual year-end insurance industry update, a team of our industry specialists gave key updates on the latest accounting guidance, regulatory matters and new tax developments. They discussed ways that insurance organizations can take advantage of the New Markets Tax Credits (NMTC) program, along with other important tax credits and incentives updates, and the importance of implementing an artificial intelligence (AI) governance model that is appropriate for your organization.

Below is an overview of key takeaways and a recording of the webinar. Contact us for questions or further discussion on any of the below topics.

New accounting guidance and key updates

One of the most talked about changes is the CECL standard (Accounting Standard Update (ASU) 2016-13 and related ASUs) that was required to be implemented by Jan. 1, 2023. It replaces the legacy Generally Accepted Accounting Principles (GAAP) concept of the insured loss model.

The standard will affect all GAAP filers to some extent, depending on their individual circumstances. In many cases, the ultimate accounting will not change drastically and the numbers reported in an organization’s financial statements may not differ from what it has historically reported. However, because the company may need to alter its policies, procedures and internal controls as it is implementing CECL, it should change the way it reaches its conclusion.

The National Association of Insurance Commissioners proposed a complete rejection of CECL at its fall national meeting. The rejection is exposed for comment until Feb. 2024.

A new concept that will significantly affect statutory accounting is the NAIC’s bond project. The initiative stemmed from the increasing sophistication of investments that were showing up on insurers’ balance sheets, specifically items that were reported as bonds but had equity-like characteristics. To understand from an accounting perspective, the NAIC established this bond project which has yielded two primary components: 1) the principles-based bond definition and 2) reporting changes to follow the implementation of accounting changes.

The NAIC has created a decision tree to help organizations determine if an investment qualifies as a bond. The majority of insurers’ portfolios will be minimally affected. In fact, holders of only traditional issuer obligations will likely not feel any impact. The assets that will require additional analysis include:

  • Those that are collateralized by underlying equity investments
  • Those collateralized by nonfinancial assets relying heavily on cash flows not contractually secured
  • Those with other unique or complex structures, particularly when third party market validation is not present to help support conclusion

Insurers should collaborate with their investment advisors during 2024 to be prepared for adoption of the standard effective Jan. 1, 2025.

ASU 2018-12 will target improvements for long-duration contracts. Its four main areas of focus are:

  1. A more current measure of insurance liability
  2. Consistent measurement of market risk benefits
  3. Simplified amortization of deferred acquisition costs
  4. Enhanced disclosures

This is effective for fiscal years beginning after Dec. 15, 2022 for public companies and effective calendar year 2025 for all other entities.

  • See the webinar recording below for a summary of additional GAAP and SAP updates and revisions which are effective in 2023 and beyond.
  • The Statutory Accounting Principles Working Group met to adopt SSAP revisions on Dec. 1, 2023. Read our article summarizing actions taken by the Statutory Accounting Principles Working Group.
Tax updates
  • 168(k) bonus depreciation four-year phase-out begins in 2023: 80% in 2023, decreasing by 20% per year by 2027
  • 163(j) interest expense limitation: Prior to 2022, earnings before interest, taxes, depreciation and amortization (EBITDA) was used to calculate adjusted taxable income (ATI). Beginning in 2022, earnings before interest and taxes (EBIT) is used to calculate ATI. Limitation decreased from 50% of ATI to 30% of ATI in 2022
  • Beginning in 2026, tighter rules on taxation of international operations (GILTI, BEAT, FDII)
  • Amended by the TCJA and applicable for tax years beginning after Dec. 31, 2021
  • Specified research and experiential (SRE) expenditures required to be capitalized and amortized
  • The IRS announced in Notice 2023-63 its intent to issue proposed regulations. This serves as interim guidance until the proposed regulations are issued
  • Research and development tax credits are available

Signed into law by President Biden on Aug. 16, 2022, the Inflation Reduction Act of 2022 (IRA) focuses on climate change initiatives and provides an additional $80 billion in funding for the IRS. Key areas impacting corporations include the Corporate Alternative Minimum Tax (CAMT) and a new excise tax on the repurchase of corporate stock.

The CAMT applies to tax years beginning after Dec. 31, 2022, and is a minimum 15% tax on the adjusted financial statement income (AFSI) of applicable corporations. An applicable corporation is any corporation (other than S corporation, RIC or REIT) which meets the AFSI test for one or more preceding tax years that end after Dec. 31, 2021. The AFSI test is met if the annual AFSI for a three-year period ending with such year exceeds $1 billion. The CAMT is in excess of the Tentative Minimum Tax over the Regular Income Tax.

The excise tax on the repurchase of corporate stock applies to stock repurchases occurring after Dec. 31, 2022. There will be a 1% excise tax on the fair market value (FMV) of any stock repurchased by a domestic corporation if its stock is traded on an established securities market (covered corporation). This tax also applies if the specified affiliate acquired covered corporation stock from other shareholders. A specified affiliate is generally a partnership or corporation in which the covered corporation owns greater than 50% equity interest. The amount of stock repurchased reduced by FMV of any stock issued by a covered corporation during a taxable year, including stock issued or provided to employees.

Excise tax does not apply:

  • To the extent the repurchase is part of a tax-deferred corporate reorganization and no gain is recognized by the shareholder
  • If stock repurchased is contributed to an employer-sponsored retirement plan
  • If the total value of the stock repurchased during the year does not exceed $1 million
  • Under Internal Revenue Service (IRS) regulations, in cases in which the repurchase is by a dealer in securities in the ordinary course of business
  • To repurchases by a RIC or REIT
  • To the extent that the repurchase is treated as a dividend

On Sept. 14, 2023, the IRS imposed a moratorium on processing new employee retention credit (ERC) claims due to ongoing concerns of fraud. The IRS continues to process previously filed claims, albeit at a significantly reduced speed to allow for increased scrutiny. On Oct. 19, 2023, the IRS announced a claim withdrawal program for taxpayers who have not yet cashed or deposited their refund checks. The IRS is also working on guidance for employers who were misled into making a potentially erroneous claim and have already deposited or cashed their refund. Despite numerous IRS warnings, the moratorium and the launch of the withdrawal program, ERC promoter firms continue to aggressively market their services. The IRS is currently working with the Justice Department to address fraud and promoter firm activity.

The IRS is in the early stages of deploying some of the $80 billion allocated to the agency, and will ultimately be employing new technology, recruiting more experienced agents and proactively target areas of perceived noncompliance. It will also focus more on the audits of large partnerships and employ a centralized partnership audit regime (CPAR) which will shift significant burdens to taxpayers instead of the IRS. Partnership operating agreements should be modified. The IRS will also be implementing AI in its auditing.

In 2016, the IRS released Notice 2016-66 identifying micro-captive insurance structures as a transaction of interest. The Section 831(b) election will be taxed on net investment income (NII). Notice 2016-66 has been taken to court multiple times and was invalidated purely on administrative reasons. The IRS released proposed regulations identifying certain micro-captive insurance structures as listed transactions and transactions of interest. It is recommended to continue to file Form 8886.

Congress is currently divided and prospects for any substantial tax legislation in the near future are remote. There are two upcoming deadlines on Jan. 19, 2024, and Feb. 2, 2024, to fund the government to avoid a shutdown. The senate is contemplating potentially combining the remaining appropriations bills into a single package. The outlook for timing on a resolution and the possibility of inclusion of tax provisions in legislation remains uncertain at this time.

Possible short-term items with bipartisan support:

  • Restoration of research and development expensing
  • Restoration of more favorable formula for computing business interest expense limitation (reverting to EBITDA from EBIT)
  • Extension of 100% bonus depreciation
  • Change to reporting threshold for Form 1099-K
  • Raising $10,000 cap on state and local tax deduction

Possible long-term items with bipartisan support:

  • Extension of §199A deduction
  • Digital asset oversight and taxation

Top Democratic tax priorities:

  • Businesses: increase corporate rate, extension of some TJCA provisions affecting businesses
  • Individual, trusts and estates: extension of TCJA tax rates for those making under $400,000 a year and expansion of the Child Tax Credit

Top Republican tax priorities:

  • Businesses: extension of TCJA provisions affecting businesses
  • Individuals, trusts and estates: extension of TJCA tax rates and open to the expansion of the Child Tax Credit as long as it has work requirements.
  • Investors purchase NMTC at an NPV discount (around $0.78-0.82 as of Nov. 2023), which are earned over a 7-year period and applied to offset federal income tax liability  
  • Proceeds from NMTC investors fund businesses and community facilities in low-income communities that create jobs, provide social services and other outcomes that benefit low-income people and communities 
  • Recapture of the credits is not tied to the financial outcome of the underlying project and Baker Tilly is not aware of a recapture event in the history of the NMTC program  
  • Several states offer a state-level NMTC program that can be combined with federal NMTC 
  • NMTC projects can be sourced for investors that provide CRA and ESG benefits in addition to an attractive return on investment 
  • The Inflation Reduction Act enabled the portability of federal Investment Tax Credits and Production Tax Credits (ITCs and PTCs) allowing the owner of a qualified clean energy project to sell tax credits to a third party purchaser
  • Factors such as compliance with federal prevailing wage and apprenticeship requirements, the use of domestic steel, iron, and U.S. manufactured components and location of the project determine the ITC rate, which can be up to 50% of eligible costs
  • Purchasers may carry back ITC up to three years from the date that the qualified clean energy project was placed in service (year of production for PTC) for a refund and carried forward for 22 years
  • A pre-construction report that projects ITC by assessing the eligible cost basis and applicable ITC rate. The memo is updated post-construction to validate actual costs with a cost segregation study and source documentation to support the final ITC rate. The post-construction memo is the support for the purchaser to take the credit on their federal return
  • ITC has a 5-year recapture period, which is often mitigated with recapture insurance or an indemnification from a credit rated seller. PTC are not subject to recapture
  • As of November 2023, pricing for ITC is $0.89-0.92 and $0.92-0.94 for PTC
  • ITC and PTC can be syndicated to purchasers as part of their tax rate management strategy and to achieve clean energy environmental, social and governance (ESG) goals
Artificial intelligence (AI) governance

On Aug. 15, 2020, the National Association of Insurance Commissioners (NAIC) adopted principles for AI and its use within the insurance industry. These principles require insurers to:

  • Proactively avoid discrimination against protected classes
  • Monitor AI operations and resolve harmful, unintended consequences
  • Disclose use of AI and give consumers an opportunity to inquire/challenge AI decisions
  • Embed risk management throughout the AI life-cycle

The principles are not yet a law and not enforceable, but they set out the regulators’ expectations and will form the basis for future regulatory workstreams. Read our recap from the 2023 national meeting for the latest insights from the NAIC.

The NAIC recommends that insurance companies that play an active role in the AI system life cycle (AI actors) promote, consider, monitor and uphold the following principles:

  • Fair and Ethical: AI actors should respect the rule of law throughout the AI lifecycle. This will include, but is not limited to, laws and regulations with respect to insurance, including those relating to trade practices, unfair discrimination, promotion of fair access to insurance, underwriting, privacy, consumer protection and eligibility practices, ratemaking standards, advertising decisions, claims practices and solvency.
  • Accountable: AI actors should be accountable for ensuring that the proper functioning of AI systems operate in compliance with all stated principles, consistent with the actors’ roles, the risk-based situational content, and evolving best practices.
  • Compliant: AI actors must have specific knowledge of all applicable federal and state insurance laws and regulations.
  • Transparent: AI actors should commit to transparency and responsible disclosures regarding AI systems to relevant stakeholders while maintaining the ability to protect confidentiality of proprietary algorithms and adherence to individual state regulations in all states where AI is deployed.
  • Secure, safe and robust: AI systems should be robust, secure and safe throughout the entire life cycle so that, in conditions of normal use or reasonably foreseeable use or misuse, or other adverse conditions, the AI system can function accurately and appropriately.


  • AI/ML definition and inventory: Define what constitutes AI/ML deployments, maintain visibility
  • AI/ML risk assessment: Model risk tiering, prioritization on high-risk model evaluations
  • AI/ML policies and procedures: Framework(s) to facilitate consistent, cross-functional development and deployment

Strategy: A corporate-wide strategy enabling development, implementation and scale in a controlled fashion.


  • AI/ML development: Centralized COE for AI/ML knowledge to guide
  • AI/ML implementation and use: Stage gate/validation process, implemented across approved platforms/for approved use cases
  • AI/ML monitoring and reporting: Monitoring performance and security, reporting up through the governance structure

Many of the key issues reported above will persist in 2024, along with the many new challenges that may be heading our way. Watch the webinar recording below for more information on each of these topics. To learn more about what to expect in 2024 and to hear how our insurance specialists can assist you and your team, connect with us. 

Get the latest industry updates and climb to new heights with our insurance specialists leading the way. 

Daniel E. Buttke
Brian P. Rozek
John Romano
Dave DuVarney
Mark Herzinger
Gideon Gradman
Baker Tilly Capital, LLC Managing Director
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