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There is currently a proposal from the Joint Committee on Taxation (JCX-21-15 and JCX-44-15) that would modify section 831(b) of the tax code to increase the $1.2 million threshold for tax deductible premium contributions to $2.2 million and index this amount for inflation. These changes will benefit both small insurers and the U.S. economy. This will likely make the 831(b) election a more attractive option for small insurer formations and allow for growth in existing 831(b) insurance companies.
This proposal emerged from the Senate Finance Committee and now must be scheduled for a vote by the full Senate prior to being sent to the U.S. House of Representatives for consideration.
Under section 831(b) of the U.S. tax code, small property/casualty insurance companies, including captives, may elect to be taxed only on investment income. This election is available to companies with net written premiums or direct written premiums, whichever is greater, that do not exceed $1.2 million.
While most of the attention this bill has received relates to small captive insurers, it will also impact traditional insurance companies and risk retention groups. Pinnacle has analyzed the potential number of current property/casualty insurance companies impacted by this change using 2013 calendar year written premium data from the A.M. Best Company.
Based on our review, 59 companies could be impacted by an increase in the 831(b) election to $2.2 million in written premiums. Not all of these insurers would make the 831(b) election but increasing the threshold and indexing it for inflation may make it a more attractive option.
While the actual number of small insurers impacted is relatively small, the potential is there for a 56% increase in the number of small insurers claiming the election.
The information above does not include captive insurers that would be affected by this legislation, unless they happen to file an NAIC annual statement.
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