Already weary from the toils of the
health care reform debate, US insurers are gearing up for a handful
of fresh skirmishes over new proposals to rein in the
industry.
All of the major insurance industry
associations are calling attention to a number of details in
President Barack Obama’s 2011 budget proposal, from new life
industry rules to taxation of major companies to potential changes
for offshore insurers.
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The impetus for the administration’s newest
budget proposals is quite simple: the president’s advisers are
looking for insurance-driven revenue to offset the costs of health
care reform. In each of the next 10 years, the administration is
trying to raise $1.4 billion from reforming the “treatment of
insurance companies and products” – more than half of that revenue
generated from expense disallowances for company-owned life
insurance.
More worrisome for the industry, however, are a
number of provisions in the administration’s 2011 budget which
would still need congressional approval but which contain troubling
implications for the industry. Foremost among the provisions is a
new tax on company-owned life insurance (COLI) policies.
All five of the major associations concerned
with the life sector, including the Association for Advanced Life
Underwriting and the American Council of Life Insurers, publicly
oppose the plan.
COLI protects against possible job loss from
the death of owners or key employees and it is also “widely used to
finance and secure important employee and retiree benefits”, the
American Council of Life Insurers (ACLI) and the Association of
Advanced Life Underwriting said in a joint statement.
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By GlobalDataCOLI products are widely used by businesses for
employees on which they have an insurable interest to keep
businesses running after the death of a key owner or employee, and
to finance employee benefits, including broad-based health,
disability, survivor and supplemental retirement benefits.
Hearings on the budget have already begun in
Congress. In the federal budget process, the White House makes the
initial proposals, and Congress must approve or rewrite that
spending plan.
Another proposal would undercut
longstanding rules regarding life insurers’ dividends-received
deduction (DRD) that are designed to prevent double taxation of
corporate earnings.
The administration’s proposal would reduce the
DRD that life insurers use in accounts that fund variable life
insurance and variable annuity contracts – key products for
financial and retirement security.
Also on the agenda is an array of tax reforms.
Tax issues involving an estimated $3 trillion in revenues expire at
the end of 2010, the 10th anniversary of the tax changes initiated
by former president George W Bush’s administration.
Increasing uncertainty
Compounding the uncertainty about tax
issues is the fact that there will be no estate tax as 2010
begins.
Some members of Congress have vowed to move
promptly to restore the tax at 2009 levels – a $3.5m exemption and
a 45% maximum tax rate – as soon into the new year as possible, but
the bickering that led to an inability to extend that policy for a
even short period leaves uncertain when a short-term solution will
become law.
The industry also is closely watching efforts
to “harmonise” the standard of care that sellers of investment
products must use in offering products to their customers.
A provision in the financial services reform
measure passed by the House in early December would give the
Securities and Exchange Commission (SEC) discretionary rule-making
authority to harmonise standards of care, although the insurance
industry is wary of ceding that much power to the SEC.
On the issue of harmonising the standard of
care sellers of investment products must use, several industry
groups sent a letter asking that any Senate bill should replace the
language giving the SEC authority to mandate such a standard with a
provision calling for the SEC to conduct a detailed study of the
issue.
The ACLI is also trying to eliminate language
in the congressional financial services reform legislation that
would include insurers in a systemic risk scheme that would mandate
that all financial services companies with more than $50 billion in
assets help prefund a resolution authority that would be used to
wind-down systemically risky institutions.
Another key priority for the insurance industry
is passage of legislation that would require employers who provide
defined contribution retirement plans to show participants annually
the value of their retirement account and how that account
translates into guaranteed monthly payments, based on age at
retirement and other factors.
Life settlements rules would also see some
changes under the 2011 budget proposal, but the industry is not
opposed to the changes, which are informational in nature.
On benefits of more than $500,000, the owner of
the policy would have to report the purchase price, the buyer’s and
seller’s taxpayer identification numbers and the issuer and policy
number to the Internal Revenue Service (IRS), to the insurance
company that issued the policy, and to the seller. Also, the
proposal would modify the transfer-for-value rule to ensure that
exceptions to that rule would not apply to buyers of policies.
And the budget proposal additionally boosts
life insurer IRS reporting rules for private separate accounts,
designed to counter what the proposal asserts is favourable tax
treatment for investing through a life insurance company.
Unless and until health care is passed – the
current bet in Washington is that Democrats will use a straight
majority vote through a parliamentary manoeuvre to gain passage of
the legislation – everything is on the back-burner. But once
health care reform is resolved, new battles will resume. The
partisan rancour in Washington makes even the most modest proposal
a struggle, so the life insurance industry must advance its agenda
carefully and cobble majorities one vote at a time.
