• Laura Hay, Leadership |
  • Philip Jacobs, Leadership |

The insurance industry and tax environment are evolving at pace and the ability to anticipate change and effectively adapt to it quickly and early is as important now as ever, as we cope with rising costs, global political and economic uncertainty, new laws and regulatory guidance, rapidly changing operating models, and higher prevailing market interest rates. Insurers should prepare for these uncertainties and anticipate the change that will likely continue to come. Many of these changes can affect insurance company tax departments.

Tax professionals will need to stay poised to quickly adapt and consider how new rules and developments could impact their organization.

Here are five steps insurance company teams and tax professionals can take now to prepare for the future:

1. Invest in the future

As the contour of the landscape continues to change, insurance companies must ensure that their tax teams have the proper funding to meet increased regulatory and legislative demands. Whether funding is allocated to increasing resources such as headcount, improving the department’s technology, or outsourcing or co-sourcing elements of the tax department, investing in tax teams will help drive lower risk and greater opportunity for insurers.

2. Build an efficient team

Increased hiring of tax professionals with tax technical backgrounds may be necessary, or the insurance company could consider outsourcing to a third-party organization. Doing so will help create a scalable tax department, free-up capacity for tax professionals to focus on more strategic projects, and improve the tax control environment, ultimately delivering more opportunity and cost savings for insurers. Automation of certain tax functions will continue to increase in importance and may require insurers to recruit talent with sophisticated technology skills.

3. Consider ESG initiatives

Strategically-oriented tax departments consistently look for ways to drive value for their insurance organizations by optimizing their effective tax rate through tax-planning and tax-saving opportunities. However, tax leaders must ensure that these value-drivers remain aligned with the insurance company’s overarching ESG initiatives. In certain cases, reducing the insurance company’s tax rate, particularly if not accomplished in the context of broader business objectives, may not be fully consistent with the insurer’s ESG narrative.

4. Account for tax implications of a new digital and remote environment

As digital assets become increasingly embedded in our economies, we see the pace of change accelerating for crypto currencies. For example, recent legislative, regulatory and executive action in many countries and regions (e.g., US, Australia, UK, EU, South Africa, and more) has focused on how cryptocurrencies should be defined and regulated. Insurance companies should continue to stay alert and be able to adapt swiftly to the ever-changing environment and related risks.

Alongside digital assets, the tax implications of a remote workforce should remain top-of-mind. A remote workforce has increased the state (and in some cases international) footprint in which insurers operate, creating a number of tax complexities, many of which need guidance to resolve.

A remote workforce puts pressure on operating and compliance models, and these models may need to be adjusted as the remote environment continues to evolve. Insurers could also benefit from specialized education efforts and should consult with specialists on the remote work topic to understand if they have specific tax, regulatory, or administrative needs as working from home – at least for a material portion of a working week – becomes the new norm.

5. Consider tax when structuring deals

Insurance industry M&A activity continues to be hot, particularly as insurers react to new regulatory requirements, non-core businesses, new capital – particularly from asset managers, and volatile interest rate markets. Tax considerations should be raised early in M&A processes to ensure that tax is integrated with risk, capital, finance, actuarial, and deal modeling. Deal models in particular need to accommodate potential prospective tax rate changes globally as the BEPS Pillar 2 initiative unfolds. Tax input can optimize Investor holding structures, corporate legal structures, and reinsurance planning, adding valuable basis points – often many basis points – to deal evaluation.

A relentless shifting of the competitive landscape for insurance companies has heightened the need for speed and efficiency in adapting to meet the needs of policyholders, shareholders, and regulators. We expect that these adaptations by insurers will require insurance company tax departments to similarly anticipate and adapt to new challenges and opportunities. Indeed, there may be situations, particularly with BEPS Pillar 2, where tax departments are helping to lead and push broader company-wide adaptations. While recognizing that each institution has its own unique set of considerations, tax in each case plays a key role in the successful evolution of the insurance company of the future.

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