Taxation of the U.S. Property/Casualty Insurance Industry

Testimony was given concerning GAO work on tax policy issues pertaining to the property and casualty insurance industry. GAO has found three areas where tax code treatment for insurance companies differs in important ways from the concept of economic income. Because of the definition of taxable income that is currently used, the tax burden of property and casualty companies is lower than it otherwise would be. GAO believes that the present definition of losses incurred is inappropriate for tax purposes and that the appropriate discount rate for a company should reflect its expected earnings rate on its invested assets. Companies might seek ways to shelter investment income through increasing holdings of tax-exempt securities or equity securities of domestic corporations. In view of the present yields on taxable securities, there appears to be ample leeway for companies to increase investment in tax-exempts beyond their current share of admitted assets. GAO also believes that costs related to the acquisition of insurance contracts should be allocated to conform more closely to economic income and that the protection against loss account is not achieving its intended purpose.