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.
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:
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:
This is effective for fiscal years beginning after Dec. 15, 2022 for public companies and effective calendar year 2025 for all other entities.
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:
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:
Possible long-term items with bipartisan support:
Top Democratic tax priorities:
Top Republican tax priorities:
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:
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:
Strategy: A corporate-wide strategy enabling development, implementation and scale in a controlled fashion.
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.
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