Insurance Changes Concentrated on Property, Casualty

Article excerpt

Major changes affecting the insurance industry in the 1986 U.S. Tax Reform Act have been concentrated on the property and casualty sector, though other significant changes were made, according to a report by the Ernst & Whinney accounting firm.

The unearned premium reserves of property and casualty firms will be affected, said David Greenwell, senior partner of the Oklahoma City office for Ernst & Whinney.

"These companies will be required to reduce their unearned premium reserves by 20 percent for tax years beginning after 1986,'' said Greenwell. "In the past, they have been able to deduct 100 percent of their annual increase in unearned premiums.

"Under the new tax law, only 80 percent of the annual increase in unearned premiums is deductable, and only 80 percent of the annual decrease in unearned premiums c in income.''

This provision was enacted to improve the matching of premium income with policy acquisition costs, he said.

Property and casualty companies also must discount their reserves for unpaid losses, Greenwell reported. For this purpose, Greenwell said unpaid losses include:

- Reported but unpaid losses.

- Incurred but unreported losses.

- Loss adjustment expenses.

- Resisted claims.

However, for small property and casualty companies, taxation has been simplified under the new tax reform act, Greenwell said.

Both mutual and stock companies, among property and casualty firms, are eligible for tax exemption if their net written premiums do not exceed $350,000, he explained. …