Insurance M&A remained very robust in 2016 after record activity in 2015. There were 482 announced transactions in the industry for a total disclosed deal value of $25.5 billion. The primary drivers of deals activity were Asian buyers eager to diversify and enter the U.S. market; divestitures; and insurance companies looking to expand into technology, asset management and ancillary businesses. We expect continued strong interest in M&A, driven primarily by inbound investment. In addition, bond yields have spiked over the last few months and are likely to continue to increase. Combined with expected rate hikes by the Federal Reserve, this should have a positive impact on insurance company earnings and, in turn, will likely encourage sales of legacy and closed blocks. However, a new U.S. president has caused tax and regulatory uncertainty that may temporarily decelerate the pace of deal activity. President Trump is expected to prioritize tax reform and changes to U.S. trade policy, both of which will have potentially significant impacts on the insurance industry. Moreover, the latest Chinese inbound deals have drawn regulatory scrutiny, and there is skepticism in the U.S. stock market about the ability to obtain regulatory approval. See also: Innovation: Solutions From… Elsewhere   Insurance activity remains high While M&A activity declined somewhat in 2016 compared with 2015’s record levels (both in terms of deal volume and announced deal value), activity remained high. In fact, announced deals and deal values exceeded 2014’s levels. Major deal trends included:

• Asian insurers seeking to grow their footprint in the U.S. continued in 2016. Japan’s Sompo Holdings agreed to acquire Endurance Specialty for $6.3 billion, and China's Oceanwide’s announced its acquisition of Genworth Financial for $2.7 billion.
• Domestic companies’ expansion into new lines of business also drove deal activity, as evidenced by Liberty Mutual’s announced acquisition of Ironshore for $3 billion and Fairfax Financial’s announced acquisition of Allied World for $4.9 billion.
• U.S. insurers, including AIG and MetLife, sought to divest noncore legacy businesses. AIG sold its mortgage insurance business, United Guaranty, to Arch Capital for $3.4 billion, and MetLife sold its retail advisor force to MassMutual, and MetLife plans to divest its consumer unit.
• Insurers have been focused on expanding into new technology- enabled markets and products and, in many instances, are seeking to do so via acquisition. Allstate announced its acquisition of SquareTrade, an extended warranty service provider for consumer electronics and appliances, for $1.4 billion. Another example is Intact Financial’s investment in Metromile, a company that offers pay- per-mile insurance.
• Deal volume in the insurance brokerage space continues apace. Brokerage deals, most notably the management-led buyout of Acrisure for $2.9 billion, accounted for 84% of total deal volume.

See also: How to Build ‘Cities of the Future’   Deals market characteristics

• Drivers of consolidation include the difficult growth and premium rate environment. In particular, there has been continuing consolidation among Bermuda insurers, notably the acquisitions of Allied World1, Endurance and Ironshore.
• Asian insurers remain interested in expanding their U.S. footprint and accounted for two of the top-10 transactions.
• There has been expansion in specialty lines of business, as core businesses have become more competitive. This is evidenced by:
  • Arch’s acquisition of mortgage insurer United Guaranty, which becomes its third major business after P&C reinsurance and P&C insurance;
  • Allstate’s acquisition of consumer electronics and appliance protection plan provider SquareTrade, which should enable Allstate to enhance its consumer-focused strategy;
  • Berkshire Hathaway subsidiary National Indemnity’s agreement to acquire Medical Liability Mutual Insurance Company, the largest New York medical professional liability provider (a deal that is expected to close in 2017); and
  • Fairfax Financial’s December 2016 announcement of a $4.9 million acquisition of Allied World, which the Ontario Municipal Employees Retirement System (OMERS), one of Canada’s largest pension funds, is contributing $1 billion in financing toward the acquisition (the deal is expected to close in 2017.)
• The insurance brokerage deals space remains active and saw two of the top-10 deals.
• Many acquirers are scaling up to generate synergies, as evidenced by Assured Guaranty and National General Holdings.
• Insurers continue to grow their asset management capabilities. For example, New York Life Investment Management expanded its alternative offerings by announcing a majority stake in Credit Value Partners LP in January 2017, and MassMutual acquired ACRE Capital Holdings, a specialty nance company engaged in mortgage banking.

Sub-sector highlights Asian buyers diversifying their revenue base has had an impact on the life and annuity sector; regulations including the Fiduciary DOL Rule and the SIFI designation; and divestitures and disposal of underperforming legacy blocks (specifically, variable annuity and long term care). The P&C sector has been experiencing a challenging pricing cycle, which has driven carriers to: 1) focus on specialty lines and specialized niche areas for growth and 2) consolidate. Furthermore, with an abundance of capacity and capital, the dynamics of the reinsurance market has changed. Reinsurers are trying to adjust by turning to M&A and innovating with new products and in new markets. There has been a wave of insurance broker consolidation, largely because of the current low interest rate environment, which translates into cheap debt. The next wave of consolidation is likely to affect managing general agents because they have flexible and innovative foundations that set them apart from traditional 9% underwriting businesses. According to PwC’s 2016 Global FinTech Survey, insurtech companies could grab up to a fifth of the insurance business within the next five years. In response, insurers have set up their own venture capital arms, typically investing at the seed stage, to keep up with new technologies and innovations and find ways to enhance their core businesses. Investments by insurers and their corporate venture rose nearly 20 times from 2013 to 2016. See also: Minding the Gap: Investment Risk Management in a Low-Yield Environment   Implications

• Sale of legacy blocks: There is a continuing focus on exiting legacy risks such as A&E, long-term care, and variable annuities by way of sale or reinsurance. Already this year, there have been two significant transactions announced: AIG is paying $10 billion to Berkshire for long-tail liability exposure, and The Hartford is paying National Indemnity $650 million for adverse development cover for A&E losses.
• Expansion of products: P&C insurers are focusing on expanding into niche areas such as cyber insurance, and life insurers are focusing on direct-issue term products.
• Technology: Emerging technologies — including automation, robo-advisers, data analysis and blockchain — are expected to transform the insurance industry. Incumbents have been responding by directly investing in startups or forming joint ventures to stay competitive, and they will continue to do so.
• Foreign entrants: Chinese and Japanese insurers have a keen interest in expanding to the U.S. market because of limited domestic opportunities and have the desire to diversify products and risk and expand capabilities.
• Private equity/hedge funds/family offices: Non-traditional investors have a strong interest in expanding beyond the brokers and annuities businesses to other areas within insurance (e.g., MGAs).

What seemed like a farfetched scenario out of Hollywood four years ago is now yet another reality that security experts have been warning about. In the screen version, the U.S. vice president is assassinated on the TV show “Homeland” after a hacker takes control of his pacemaker and stops his heart—making it look like a heart attack. In real life, the U.S. Food and Drug Administration recently released a safety warning that St. Jude Medical implantable cardiac devices and their remote transmitters contain security vulnerabilities. An unauthorized party could use the vulnerabilities to “modify programming commands” on the device that could result in rapid battery draining or “administration of inappropriate pacing or shocks.” Coincidentally, the warning came on the heels of an FDA document addressing this very issue: At the end of December, the agency released its guidance for the post-market management of medical device cybersecurity. The guidance is similar to a previously issued one for premarket design and development. Both are nonbinding. The FDA can take action against products that violate the Food, Drug and Cosmetic Act, which could include devices that pose serious risks of injury or death and lack remediation. Outside of that, it’s unclear what, if anything, the FDA would do about lower-level risks that are not being mitigated. See also: Your Social Posts: Hackers Love Them   Enforcement or not, there’s plenty of skepticism about the influence the document will have on device manufacturers. Security experts call it a good first step—emphasis on “first.” But they are not convinced that the guidance will motivate the industry to make medical devices more secure. “Absent of serious crises or patient deaths, I’m not optimistic that this document will get the attention of many companies building medical devices,” says John Dickson, a principal with the security firm Denim Group Ltd., who formerly served at the Air Force Information Warfare Center. The guidance “emphasizes that manufacturers should monitor, identify and address cybersecurity vulnerabilities and exploits as part of their post-market management of medical devices.” Among other things, the FDA recommends that manufacturers:

• Follow the National Institute of Standards and Technology (NIST) Framework for Improving Critical Infrastructure Security, which is widely used in many industries
• Implement a risk-management program for identifying and assessing vulnerabilities
• Act on information about vulnerabilities and deploy patches quickly.

A big problem to crack Dickson says that the sheer number of devices in circulation—potentially millions, registered to some 6,500 to 7,000 manufacturers—creates a major problem. “Most of the medical device companies are just trying to get the capability to work well—and here comes (a problem) they really didn’t consider before,” he says. The embedded sensors and devices were designed for a long lifespan and, in many cases, not intended to be upgraded. “If those devices cannot receive software updates at some time in their lifespan, they will be vulnerable, so the risk is enormous,” says Hamilton Turner, chief technology officer at mobile-security vendor OptioLabs. The industry has been slow to react. Ashton Mozano, chief technology officer at Circadence, a “next-generation” provider of cybersecurity training, says that some of the device vulnerabilities have been known for as long as a decade. But the response has not been like in airline or automotive safety, where “there’s a whole community that gets up in arms” when there’s a faulty or dangerous product. “We don’t really see that in cyberspace yet. The medical device industry, as well as the IoT realm, have been essentially isolated from that level of widespread global scrutiny,” Mozano says. The FDA began warning about the problem a few years ago. The guidance certainly indicates the agency’s interest in cybersecurity is growing. Unfortunately, the FDA may not be in the best position to address the problem. “They’re not in the best situation to have the knowledge and skill set … to mandate regulations for the cyber industry,” Mozano says. “They don’t want to overregulate.” Plenty of gaps to be filled The FDA defines patient harm as physical injury, damage to health or death. Other types of harm—such as loss of personal health information—is excluded from the FDA’s scope. Turner thinks that’s an oversight. He says that data taken from a device can sometimes include information about the operating environment, including secure Wi-Fi access that could be used to access the network and cause patient harm. “Ignoring loss of data in a security context can lead to some very serious repercussions,” he says. Long-term execution of the guidance also is questionable. Mozano says there needs to be “a clear assignment of roles and responsibilities throughout the entire vertical and horizontal supply chain.” And, there needs to be better leadership and a more systematic, step-by-step implementation, he says. The FDA could take a page from the automotive industry, where rankings by third-party evaluators such as JD Powers influence buying decisions. This would not only motivate manufacturers to protect their reputation but also put some of the power into the hands of the users. See also: When Hackers Take the Wheel   “This could be more effective than having draconian regulations,” Mozano says. The industry sentiment seems to be that scenarios à la TV’s “Homeland” are still far-fetched. Even the Department of Homeland Security said the vulnerability in St. Jude’s devices would have required “an attacker with high skill.” But Dickson emphasizes that what was science fiction as recently as two years ago is now becoming a major problem. After all, not too long ago “people said political campaigns were too sophisticated to hack.” “Given the widespread and ubiquitous nature of medical devices, the fact that a more sophisticated attacker could do this means it will happen at some point,” he says. “As the sophistication goes down the chain, there’ll be more automation to do it. At this point, nobody has figured out how to automatically attack, but that will happen.” This post originally appeared on ThirdCertainty. It was written by Rodika Tollefson.

Las fall, authorities in India busted nine — yes, nine — bogus IRS call centers, arresting 70 people on suspicion of tricking (and often scaring) Americans into sending money to settle “pressing” but nonexistent tax bills. You receive a call from a purported IRS agent claiming you owe money and must pay it immediately. If you can’t (or don’t) come up with the money pronto, well, you can expect a police officer or U.S. marshal at your door, and you will be arrested and thrown in jail. In a 21st-century version of this scheme, you receive a robocall where an automated voice directs you to call a specific number to settle your debts with Uncle Sam. If you don’t call back right away, you could be anything from sued to arrested to deported, or maybe you’ll just have your driver’s license revoked. It’s an inelegant ruse, of course. The prize? Your hard-earned cash and, for good measure, some of your personally identifiable information (PII). See also: Implications for Insurance Taxation?   I probably don’t have to explain this hot-and-heavy approach because you’ve probably been on the receiving end of one of these phone calls. IRS scams are so prevalent they topped the Better Business Bureau’s top scams of 2015 by a mile — and that was well before the IRS itself issued a warning to taxpayers saying there was a “summer surge” last year in IRS impersonation scams, with a new variant asking poor, unsuspecting taxpayers to fork over payment on iTunes gift cards. A sigh of relief? If you think the major bust in India means you can breathe a little easier every time your phone rings, unfortunately, you’re wrong. Make no mistake, those nine phony call centers represent only a small fraction of all the nefarious enterprises out there. Consider the latest stats from the U.S. Treasury Inspector General for Tax Administration published in The Wall Street Journal: 8,000 victims have paid more than $47 million because of these completely phony “IRS agents.” Scams are akin to the old whack-a-mole game or, to put an even finer point on it, a Lernaean hydra — cut one of them down, and two more will spring forth. In fact, around the same time police were raiding the bogus call centers, reports had surfaced that there was a new IRS scam in town: Fraudsters have started to send out notices about fake IRS tax bills related to the Affordable Care Act via email and traditional snail mail in an effort to meet their, ahem, sales goals. What you can do You should stay vigilant because it’s about to get significantly more difficult to avoid getting got. The IRS announced it’s going to begin using private collection firms to handle overdue federal tax debt, a change that could effectively throw the one-step method of avoiding phony IRS agents — hang up the phone! — out the window. The IRS has yet to make it completely clear whether it’s going to allow the collection firms it’s hired to call debtors directly. But even with this significant change, there will be a few dead giveaways that there’s a scammer on the other end of the line.

1. If you do owe Uncle Sam, you’ll have received a bill in the mail, and should you be one of the more unfortunate ones turned over to a legitimate collector, you’ll also get written notice that your debt has been transferred over to one of its collection firms: CBE Group, Conserve, Performant and Pioneer.
2. You’ll be allowed to make your payments online at IRS.gov/PayYourTaxBill, so, if you’re not being told about this option, hang up and notify the IRS.
3. Payments by check should be made to the “U.S. Treasury.” If you’re being asked to write one made payable to the collector or even the IRS (which can easily be altered to read “MRS.”), hang up the phone.
4. There will never be any threat involving police or marshals or prison.

Other ways to protect yourself Here is the toll-free number for the IRS: 800-829-1040. If you get even the slightest inkling that someone is trying to swindle you, hang up and immediately call the agency. See also: New Worry on ID Theft: Tax Fraud   If you get an email that looks like it is coming from the IRS about a tax bill, do not click on any links (which could be malware designed to infect and infiltrate your computer system and steal any payment or personal information it can get its hands on). Instead, forward the email to phishing@irs.gov and wait patiently for someone to contact you about its validity. What to do if you’re a victim If you think you’ve already been had, well, then you’ve got some work to do. Report the crime to your local police, file a complaint with the Federal Trade Commission and call the IRS at the number provided above to find out if you really owe them money. Contact TIGTA to report the call either at 800-366-4484 or by using its IRS Impersonation Scam Reporting website. And then rely heavily on the three Ms I outline in my book, Swiped: How to Protect Yourself in a World Full of Scammers, Phishers and Identity Thieves:

1. Minimize your exposure to fraud: If you did turn over your most sensitive personal information, request that a fraud alert be put on your credit file by all three credit bureaus — Equifax, Experian and TransUnion. You need only contact one, and it will electronically notify the other two. You might also consider a credit freeze, which is more comprehensive but cumbersome because you need to notify each credit bureau individually; lockdown of your credit report prevents thieves from opening new accounts in your name.
2. Monitor your accounts. You might wish to purchase a combination credit and fraud monitoring service, which provides instant alerts if someone tries to open up lines of credit. You also may consider enrolling in transactional monitoring programs offered for free by banks, credit unions and credit card companies that notify you of any activity in your accounts. At the very least, keep an eye on your credit yourself. You can do this by pulling your credit reports for free each year at AnnualCreditReport.com and viewing two of your credit scores for free, updated every two weeks on Credit.com.
3. Manage the damage. Close any account that has been tampered with or opened by a fraudster without your permission. And if you gave them the veritable skeleton key to your finances — your Social Security number — be sure to notify the IRS, do all of the above and file your taxes as early as possible next year to preclude anyone from getting their grubby little fingers on your refund.

Remember, it’s not just the phony taxman you have to worry about whenever you pick up the phone. Fraudsters come in all shapes and sizes, and, no matter how many scam centers authorities put out of business, the ultimate guardian of the consumer is the consumer (i.e., you)! Stay vigilant. While identity theft may be the third certainty in life, with a little luck you can make it that much harder for fraudsters to get you in their maw. This post originally appeared on ThirdCertainty. Full disclosure: IDT911 sponsors ThirdCertainty. This story originated as an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners. More on identity theft: Identity Theft: What You Need to Know 3 Dumb Things You Can Do With Email How Can You Tell If Your Identity Has Been Stolen?

The irony of all ironies. The GOP healthcare plan defeated by the GOP! And I'm glad, given all the well-documented problems with the bill.

The Congressional Budget Office or CBO estimated that 17 million to 24 million Americans would lose their health insurance under the GOP repeal and replace plan. I would have been on top of the list, because I am over 60 but not old enough for Medicare. My grandfather was a Marine in World War I. Both my parents and all of my uncles served in World War II. My grandparents on my mother’s side came to Ellis Island a century ago. I am a red-blooded, patriotic American. How dare they try to take away my health insurance.

See also: Is U.S. Healthcare Ready for ‘All Payer’?  

I get that the ACA has major issues and needs fixes. I, too, have several issues with the ACA, including the employer mandate and how small employers are charged premiums under the ACA. (See: "A Quiet ACA Waiver -- and Needed Change," from April 2014.) I am on board with healthcare reform but not when it's done on the backs of small employers.

Americans do need sound options for affordable healthcare coverage based on their needs. I get it.

The American public is sick of this political nightmare. The GOP thinks they need to repeal Obamacare to get reelected. Hello, the American public was 56% to 17% against the GOP plan. It is time for a bipartisan approach to healthcare reform. 46 U.S. Democratic senators just signed a letter that they be open to bi-partisan discussions to improve and provide fixes to the ACA, as long as the outright repeal of the ACA is not part of the deal. President Trump also just stated he'd be very open to discussions with the Democrats. Where does it say in the Constitution that to pass a bill in Congress all the votes have to come from one political party?

In addition, several moderate GOP congressmen were not in favor of the bill. My congressman, Rodney Frelinghuysen (R-11th NJ District), and three other Republican congressman from the Garden State announced opposition to the GOP bill for the right reason. It would have hurt the poor, the elderly and working families in their districts. Their offices were flooded with constituents opposed to the plan, along with powerhouses like the AARP.

The bottom line and reality is healthcare costs are never going down. We have an aging population of baby boomers with a ton of health problems, now and coming up. One of the major problems with the ACA is that the costs cannot currently be sustained, and a major reason is that 45% of the millennials ages 18 to 30 have not signed up, even though the overwhelming majority voted for President Obama and the Democratic party.

We have the best healthcare in the world in the U.S. Hands down. However, it is terribly wasteful, inefficient and fragmented. We still rely basically on a fee-for-service system that results in unnecessary and even harmful medical care. (See: "Unnecessary Surgery: When Will It End?" from October 2015.)

The only way to a lasting bipartisan agreement is to find common ground one issue at a time:

--Start with the major premise of the ACA, that Americans cannot be denied coverage for a pre-existing condition. Check.

--Next, help small employers hurt by the ACA and rising premiums.

--There appears to be widespread agreement to allow small employers to ban together in risk pools similar to workers' compensation.

--Chuck Schumer just indicated a willingness to give the 50 state healthcare commissioners more power and control over premiums in their state. Remember healthcare, like politics, is all local.

--Consider tort reform based on the use of documented medical protocols by medical professionals. Millions of unnecessary tests are performed every day due to medical providers' fear of a potential malpractice claim.

--Pass a bill to help medical students with their tuition and student loans if they will help serve as primary care providers in poor or rural neighborhoods for a year or two.

See also: Healthcare: Asking the Wrong Question  

There are a ton of good ideas out there that we spend our healthcare dollars on, including prevention and wellness and not sick care.

The time for bipartisan reform is now.

In recent months, I have been networking with insurance sales leaders in the Northeast U.S., having conversations about their experience building insurance agencies and sales teams. See also: Agency Succession Plans: Do It Now!   The following patterns surfaced as we discussed the current agency and sales team's challenges and opportunities: 1. Insurance agency and team leaders report that staffing and recruiting is their top challenge. Agency owners report staffing their offices to be most challenging, in particular regarding producer roles. Insurance sales team leaders, such as self-employed professionals with Primerica, report challenges with recruiting team members who are credible and have the qualities to succeed. 2. Lead generation was another challenging area.  One of the sales team leaders indicated that he has found referrals to be the best way to find prospects.  He reported that he routinely obtains 10 or more referrals from his customers. 3. Mindset and having the ability to stay the course was mentioned as another area of challenge. See also: Could Your Agency Pass a Risk Audit?   4. Finally, some mentioned retention. The problem of retention surfaced when we discussed new recruits experiencing difficulty in dealing with rejection. Further training on business building and on how to build relationships with prospects was mentioned as a potential solution. What do you think about these challenges? Do they reflect the challenges that you find in building your business?

During his campaign, President Trump identified tax reform as a central pillar of his agenda to create 25 million jobs over the next decade. Similarly, Congressional Republicans have said that tax reform is essential to increasing economic growth and hope to complete action on tax reform legislation before the end of this year. Many Congressional Democrats, including Senate Democratic leader Schumer and Senate Finance Committee ranking member Wyden, also have supported corporate rate reduction to boost U.S. international competitiveness, provided it is done on a revenue-neutral basis. While there is little detail on specific tax reform proposals at this early stage in the process, insurance companies will be asking how various tax reform proposals may affect the U.S. tax treatment of their domestic and foreign operations as tax reform efforts advance in 2017. With the proviso that the tax-reform situation is very fluid, here is what the proposals currently put forward by the president, the House and the Senate could mean: During his campaign, President Trump proposed reducing the U.S. corporate tax rate from 35% to 15%. He also would repeal the corporate alternative minimum tax (AMT). His plan would eliminate “most business tax expenditures,” except for the research credit. President Trump’s tax plan also would impose a one-time, 10% repatriation tax on overseas corporate profits. Earlier in his campaign, Trump’s tax plan specifically called for the repeal of tax deferral on the foreign earnings of U.S.-based companies, but his most recent plan does not address the taxation of future foreign earnings. A House Republican task force on tax reform, led by Ways and Means Committee Chairman Brady, prepared the Blueprint. Chairman Brady and committee staff have been working since July of last year to draft statutory language that reflects the goals and principles outlined in the Blueprint. Under the Blueprint, the top U.S. corporate income tax rate would be reduced from 35% to 20%. The Blueprint generally proposes eliminating all business tax expenditures except for the research credit. In addition, the Blueprint would move the U.S. from a worldwide international tax system to a “territorial” 100% dividend-exemption system and impose a mandatory “deemed” repatriation tax (8.75% for cash or cash equivalents and 3.5% for other accumulated foreign earnings). The cash flow system proposed by the Blueprint includes immediate expensing of all depreciable and amortizable new business investment and denying a deduction for net interest expense. The Blueprint notes that special rules are needed for banking, insurance and leasing business activities under the proposed border adjustable destination-based cash-flow tax system. As of mid- February 2017, the details of such special rules remain under consideration by Chairman Brady and his staff. The Blueprint proposes to establish a “destination-based” business tax system that would be “border adjustable” by exempting the gross receipts from export sales and imposing tax on imports, which could be achieved through the denial of a deduction for the cost of the imports. In recent interviews, Chairman Brady has described border adjustability as a critical part of the Blueprint, stating, “It became clear we needed border adjustability to eliminate all the incentives for companies to move jobs, innovation and headquarters overseas.” Chairman Brady and other House Republican leaders also have cited border adjustability as a key means of offsetting the cost of lowering the U.S. corporate tax rate to 20%. Although there are no official revenue estimates for the House Republican Blueprint, the Brookings Institution-Urban Institute Tax Policy Center has estimated that border adjustment raises $1.2 trillion over 10 years. The cost of lowering the U.S. corporate tax rate to 20 percent and the cost of repealing the corporate AMT was projected to be $1.8 trillion over the same period. House Republican leaders have noted that they would need to identify alternative means offsetting a reduction in corporate tax rates if their border adjustment proposal is not adopted. In 2014, former House Ways and Means Committee Chairman Dave Camp (R-MI) introduced a tax reform bill (H.R. 1) that included provisions to lower the U.S. corporate tax rate to 25% and included a broad range of revenue offsets affecting various industries. Revenue offsets in H.R. 1 affecting insurance companies included proposals to change the way life insurance reserves and non-life insurance reserves are computed, and changes to the taxation of deferred acquisition costs (the “DAC” tax). Other offsets included changes to life and non-life insurance company proration for DRD and tax-exempt interest. H.R. 1 also proposed an increase in the discount rate used to compute life insurance reserves. Under H.R. 1, U.S. insurance companies also were not permitted to deduct reinsurance premiums paid to a related company that is not subject to U.S. taxation on the premiums, unless the related company elects to treat the premium income as effectively connected to a U.S. trade or business (and thus subject to U.S. tax). The Blueprint states that transition rules will be needed for tax reform in general and in particular for the move to a destination-based cash-flow business tax system; however, it does not describe those transition rules. Chairman Brady recently has reaffirmed that he does not support exemptions for individual business sectors, but he is prepared to consider transition relief. See also: Implications for Insurance Taxation?   Senate tax reform proposals In a Feb. 1 speech, Senate Finance Committee Chairman Orrin Hatch (R-UT) said the Senate is working on its own tax reform plan, and the “hope is to have a tax reform proposal in one form or another to discuss publicly in the near future.” Chairman Hatch has expressed hope that the Senate tax reform effort will be able to secure bipartisan support. Without Democratic support, Chairman Hatch has noted that “we’ll basically need universal Republican support to pass anything through [budget] reconciliation” procedures that allow for legislation to pass with a simple majority. Most Senate legislation requires approval by a 60-vote supermajority. Chairman Hatch has not taken a position on the border tax adjustment. However, he has noted that several senators have expressed concerns or opposition to the House proposal. Senators who have announced opposition to the House border adjustment proposal include Senate Majority Whip John Cornyn (R-TX), who also serves on the Finance Committee, and Sen. David Perdue (R-GA). “What it means is that the Senate will have to work through its own tax reform process if we’re going to have any chance of succeeding,” Chairman Hatch said in his Feb. 1 remarks. “No one should expect the Senate to simply take up and pass a House tax reform bill, and that’s not a bad thing.” While now focused on pursuing comprehensive tax reform, Chairman Hatch and his staff had been working over the last two years on a corporate integration proposal that would subject business income to a single level of tax. The proposal, which has not been released to date, has been expected to adopt a dividends-paid deduction approach in which dividends are treated like interest (i.e., deductible payments) and a withholding tax is imposed on both to ensure one level of U.S. tax on interest and dividend income. Implications

• There is little detail on specific tax reform proposals that could affect the insurance industry at the time of this document’s publication. Accordingly, insurance companies will need to closely monitor how various tax reform proposals may affect the U.S. tax treatment of their domestic and foreign operations as tax reform efforts advance later in 2017. PwC will provide timely updates on developments as they arise.

Administrative Developments A number of administrative developments occurred in 2016 concerning insurance companies. These developments affected insurers in various lines of business:

• Life insurers – The most significant development for life insurers remains the adoption of Life Principles Based Reserves (PBR), effective as early as Jan. 1, 2017, for some companies and some contracts issued on or after that date. Life PBR has a number of related tax issues, and the IRS and Treasury Department provided its first guidance in Notice 2016-66, setting forth rules for implementing the 2017 CSO mortality tables. Life PBR remains on the annual Priority Guidance Plan, was recently identified as one of 13 “campaigns” to which the IRS will devote significant resources in the coming months, and is the subject of an Industry Issue Resolution (IIR) project.

Two other 2016 administrative developments are particularly important for life insurers. First, Notice 2016-32 provides an alternative diversification rule under section 817(h) for a segregated asset account that invests in a government securities money market fund. The new, alternative diversification rule in Notice 2016-32 facilitates such investments. Second, Field Attorney Advice 20165101F concludes that a change in the computation of the statutory reserves cap that applies to life insurance reserves is a change in basis and therefore required to be spread over 10 years. Although Field Attorney Advice is not precedential, this conclusion was controversial, and companies are still considering the issue as potential changes in basis arise.

• Non-life insurers – IRS Attorney Memorandum (“AM”) 2016-002 addresses the mechanics of a change in method of accounting for unearned premiums by a Blue Cross or Blue Shield organization that fails to meet the medical loss ratio (MLR) requirement of section 833(c)(5). The guidance is helpful to a broader class of nonlife insurers than Blue Cross organizations because it illustrates the operation of the unearned premium reserve and the application of section 481 to changes in accounting method more generally.

In addition, in early 2017, the Departments of Labor (DOL), Health and Human Services (HHS) and Treasury issued Frequently Asked Questions about ACA implementation, including guidance defining the term “health insurance coverage.” Under that guidance, the provision of Medicaid coverage to Medicaid recipients as a managed care organization, and the provision of coverage under a Medicare Advantage organization or plan or a Medicare prescription drug plan is not “health insurance coverage.” This interpretation could excuse some companies from the compensation deduction limitation of section 162(m)(6) and could clear up confusion created by two prior Chief Counsel Advice memoranda (201610021 and 201618010).

• Health insurers – No payments will be required in 2017 under the Affordable Care Act (ACA) Health Insurance Provider fee, as a result of that fee’s suspension under the Consolidated Appropriations Act of 2016. Health insurance providers are still required to file Form 8963 for the 2016 year pending legislative developments on the ACA.

In addition, some insurers (particularly health insurers) anticipate significant guaranty fund assessments as a result of the liquidation of Penn Treaty America Insurance. Many such companies (other than Blue Cross organizations) account for those payments on a reserve basis as premium- based assessments under Rev. Proc. 2002-46.

• Captive insurance companies – Section 831(b) allows certain small, non-life insurance companies to elect to be taxed only on investment income and not on underwriting income. The IRS and Treasury Department have not provided guidance on changes that the Protecting Americans from Tax Hikes (PATH) Act of 2015 made to the requirements to qualify for that provision.

See also: Be on the Lookout for These 3 Tax Scams   Captive insurance companies – particularly small (“micro”) captive insurance companies -- remain a significant administrative priority, however. For example, Notice 2016-66 identifies a significant number of such companies as “transactions of interest” for which reporting is required. Those reporting requirements are drafted broadly, and a large number of companies are in the process of reporting. The IRS also has identified “micro captive” insurance companies as a “campaign” issue that is a priority for the IRS in targeting its examination resources. Furthermore, practitioners and taxpayer alike are still waiting for the Tax Court’s decision in Avrahami v. Commissioner, which could provide even more judicial guidance on insurance qualification in the context of captive insurance.

• Regulations under Section 385 (characterization as debt or equity) – In spring 2016, the IRS and Treasury Department proposed regulations that would establish a contemporaneous documentation requirement that must be satisfied for certain related- party debt to be respected as debt and recharacterize as equity certain instruments that were intended to be treated as debt for Federal income tax purposes if they are issued in connection with certain distributions and/or acquisitions, even if they met the documentation requirements. The proposed regulations generated significant Congressional and taxpayer concern, including nearly 200 unique comment letters. In fall 2016, the IRS and Treasury Department released final and temporary regulations. The government made significant changes in the final regulations in response to taxpayer comments. The overall scope of the proposed regulation has been reduced through a number of exemptions in the final and temporary regulations. The final and temporary regulations do not apply to debt instruments issued by foreign corporations. They also do not apply to interests issued by regulated insurance companies other than captive insurance companies. The final regulations also treat surplus notes of an insurance company as meeting the documentation requirements of the regulations, even though approval or consent of a regulator may be required for payments under the notes. However, the final regulations make no special provision for life insurance companies that are prevented from joining a consolidated return by the life-nonlife consolidated return limitations, nor do they provide specific guidance on the treatment of a company’s obligations under funds withheld reinsurance.
• Regulations Under Section 987 – The IRS has issued final and temporary Section 987 regulations in December 2016. The final regulations implement an accounting regime based largely on proposed regulations issued in September 2006, to account for income earned through a qualified business unit (QBU) that operates with a functional currency different than that of its owner (e.g. foreign branches). Similar to the 2006 proposed regulations, the final regulations generally do not apply directly to insurance companies but may be relevant to non-insurance affiliates.

2016-17 Priority Guidance Plan As in prior years, the IRS and Treasury jointly issued a Priority Guidance Plan outlining guidance it intends to work on during the 2016-2017 year. The plan continues to focus more on life than property and casualty insurance companies. The following insurance-specific projects, many of which carried over from last year’s plan, were listed as priority items:

• Final regulations under §72 on the exchange of property for an annuity contract. Proposed regulations were published on October 18, 2006;
• Regulations under §§72 and 7702 defining cash surrender value;
• Guidance on annuity contracts with a long-term care insurance rider under §§72 and 7702B;
• Guidance under §§807 and 816 regarding the determination of life insurance reserves for life insurance and annuity contracts using principles-based methodologies, including stochastic reserves based on conditional tail expectations;
• Guidance on exchanges under §1035 of annuities for long-term care insurance contracts; and
• Guidance relating to captive insurance companies.

Less clear is what projects the 2017-2018 Priority Guidance might include. For example, the Trump administration may have different guidance priorities than its predecessor. In addition, a recent Executive Order requiring agencies to relieve existing regulatory burdens in exchange for imposing new ones could complicate the number of guidance items that may be published or the form those items may take. Implications

• Life insurers should consider the effect of Life PBR tax issues on product development, financial modeling, and compliance as some companies consider a January 1, 2017, effective date.
• Nonlife insurers who move in and out of insurance company status (or whose products move in and out of insurance contract status) should consider whether the recent Attorney Memorandum sheds light on the application of section 481 to insurance- specific items such as unearned premium reserve.
• Health insurers can expect significant changes in tax rules and, in particular, one-time transition rules as a result of the 2017 suspension of the Health Insurance Provider Fee and the likely repeal (and possible replacement) of the ACA.
• Captive insurers should be prepared for additional IRS scrutiny as a result of the Priority Guidance Plan item promising guidance, identification of the micro captive issue as a “campaign,” and the possibility that a decision in the Avrahami case could shed more light on insurance qualification for Federal income tax purposes.

As the on-demand workforce continues to grow -- reaching 55 million freelancers in the U.S. in 2016 -- insurers are tapping into the so-called gig economy. It's only logical that agents should follow suit. There are processes within every agency that can be adapted to the gig economy, where the agent can save money and have access to experienced personnel at the same time. Claims Processing There are millions of gig workers across North America ready to be assigned to conduct a variety of tasks of relevance to insurance carriers. These include asset verifications, property inspections, document retrievals, salvage verification, taking photos of damaged vehicles, meeting with customers and so much more. My experience as CEO of WeGoLook, one such provider of the above services, shows me how leveraging gig workers can reduce overhead, improve efficiency due to mobile innovation and speed claims processes. Workload Surge Support Many insurance carriers require agents to provide pictures of risks such as homes, autos and commercial properties with an application. All carriers also require photos of these risks when writing new business immediately following the lifting of a weather-related moratorium. Using workers contracted through experienced gig economy field services providers enables the agency to leverage experienced professionals at a moment’s notice. Literally the swipe of a smartphone or click of a dashboard button! See also: Gig Economy: Newest Tool for Insurance   Customer Service Every agency owner recognizes that a substantial portion of resources goes to providing services that do not generate a premium. Typically, these tasks include driver changes, address and contact information changes and taking payments over the phone. Because these tasks to do not involve insurance transactions, discussing coverage and offering advice, they can in most cases be handled by a non-licensed representative. Having an on-demand gig service standing by to accept these calls and conduct the necessary will save you money. And we aren't just talking about phone calls. All web service requests can also be directed to a mailbox monitored by a gig worker. It's Time to Embrace the Gig More people are working in the gig economy, many more are using it, and insurance providers and agencies can leverage it for cost savings and claims efficiencies. Simple as that. No doubt, seasoned agency owners and managers may push back from embracing the gig economy and understanding how on-demand workers can streamline agency processes. Seasoned agents have tried and true methods they use for writing business and that's completely understandable. But when there's a way of doing something better and cheaper, it's best to at least test the waters. Remember that in this new digital economy, innovation is paramount.

Our cities are built brick by brick, often using construction practices that have evolved little in the last century and giving little regard to proper planning and sustainable development. Yet innovations and new technologies have produced progressive means of constructing the built environment to ensure that urban infrastructure, once in place, can make a valuable contribution to the workings of a city for centuries to come, withstanding many changes in use and function. Good urban infrastructure needs to anticipate change, be built to adapt and to be resilient. The Global Agenda Council on the Future of Cities has detailed 10 of the most important urban innovations that will shape the future of our cities. At the heart of these innovations is an understanding that the cities of the future need to be flexible and adaptive on a day-to-day level – doing more with less space and resources – and, in the long term, be able to adapt to the powerful mega-trends placing heavy pressures on the urban environment. The three key trends that will shape the agenda of cities for years to come are: demographic shifts, a changing environment and resource scarcity and technology and business model disruption. Demographic shifts The UN reports that the global population will rise to 9.6 billion by 2050. Nearly all of this population growth will occur in cities – it estimated that 66% of the global population will live in urban areas by 2050. Most of these cities are located in the global South and, at present, lack the capacity and resources to ensure that growth is sustainable. Unchecked urban population growth can lead to vast unsustainable urban sprawl, or the creation of dense slums. Cities will need to accommodate more people without increasing their urban footprint; increasing density, without decreasing quality of life. This can be achieved with reprogrammable living space such as MIT’s reprogrammable apartments or by building structures with multiple uses in mind, ensuring that they can be used for different purposes at different times of the day or week, such as reusing office space or schools for social or leisure activities during the evenings or at the weekend. In the developed world, years of declining birth rates and longer life expectancy are leading to a rapidly aging population, with its own set of challenges. The effects of this demographic shift are already being felt in countries including Japan, Italy, Germany and Norway, with pressure being put on cities to rethink the provision of urban infrastructure, embrace universal design and reuse and repurpose buildings and infrastructure that is becoming obsolete. See also: Moving Closer to the ‘Smart City’   This trend is also increasing the demand for health and social services and the provision of housing that will meet the needs of people during their 100-year life. Tokyo is at the forefront of this trend; an estimated 200 schools per year are closing, and the city is repurposing them as adult education centers, senior homes and places of leisure and exercise for the elderly. Cities in other advanced economies need to prepare for this eventuality. Changing environment and resource scarcity The world’s climate over the next century is likely to shift dramatically. Increased occurrences of extreme weather events, desertification and rising sea levels all threaten the world’s cities. Fifteen of the world’s 20 largest cities are located in coastal zones threatened by sea-level rise and storm surges. To prepare for these challenges, cities need to be resilient, building coping mechanisms into their urban fabric. If well-designed, infrastructure that protects against high-impact climate events can also be flexible, serving a valuable purpose for the entirety of its life. Projects such as New York’s Dry Line, or Roskilde’s flood defense skatepark combine resilient infrastructure with a space for community leisure activities. [caption id="attachment_24740" align="alignnone" width="600"] Source: Outlook on the Global Agenda 2015[/caption] The urban planner Patrick Abercrombie, who created London’s post-World War II master plan, reserved its hinterland as a “green belt” aimed to preserve the countryside, while also providing nourishment to the city. Today, the city’s greenbelt is global, and water and resource scarcity in any region can easily disrupt the delicate balance between a city and its worldwide network of production. The advent of urban farming will help to alleviate this risk. Urban farms are largely hydroponic – feeding water and nutrients directly to the roots – and closed-loop, meaning they use as much as 90% less water. They can be placed anywhere and stacked vertically, making them as much as 100 times more productive per hectare. By 2050, the world’s population will demand 70% more food than is consumed today; urban farms will help cities to feed their growing populations, creating a vertical green belt, adding flexibility into the food system with guaranteed yields and low-risk supply chains. Cities consume vast amounts of all resources, from the materials of which they are constructed, to the demands of their citizens for products and packaging. Cities cannot continue to follow a take/make/waste pattern, filling landfills and depleting finite resources, and need to move toward a more circular economy. Systems of reuse and recycling need to be in place to smartly deal with waste, and building materials themselves need to be designed for reuse. The European Union program Buildings as Material Banks creates reusable buildings that store and record the value of their composite materials over their lifetime. Others use up-cycled materials such as shipping containers to provide low-cost, flexible housing to students and young professionals. Technology and business model disruption Cities are economic engines. According to McKinsey, 600 cities are responsible for 60% of global GDP. The healthy economy of a city sustains its population through salaries and entrepreneurial activity. However, all economic activity is subject to disruption; shifts in business models can create opportunities, but cites from Detroit to Liverpool have seen the possible negative effects of industrial change. In the fourth industrial revolution, we are likely to see the biggest industrial shifts in a generation, changing the way we work and live in the urban environment. Innovations such as 3D printing, artificial intelligence and next-generation robotics will shift models of work and production in ways that are impossible to predict. Cities and businesses need to be adaptive. Google, a company at the forefront of this change, anticipates that its business model could shift dramatically. The company's new Mountain View, CA, headquarters is adapted for this, a series of giant domes under which any number of structures, fit for any purpose, can be quickly assembled; making it completely reprogrammable for any eventual use. Cities need to take a similar approach to construction. See also: Can Insurance Become Utility, Like Electricity?   The sharing economy can be defined as the distribution and sharing of excess goods and services between individuals, largely enabled by modern technology. This new model is having a deep impact on the urban environment. Many consumers are moving away from ownership and toward access, renting access to mobility, entertainment or space. Companies of the sharing economy naturally add a layer of flexibility into the city. Airbnb, for example, allows people to rent out their apartments when they are out of town, easily increasing a city’s capacity to accommodate influxes of visitors as demand increases. As the sharing economy develops, similar companies will enable cities to turbocharge their efficiency, ensuring that no excess capacity is wasted. Humanity faces the mammoth task of adding more than two billion people to the urban population before 2050, the equivalent of creating a city the size of London every month for the next two decades. To house, feed and employ these people, cities will have to do more with less. They have to be smarter, greener and more efficient. They will have to innovate.

Humans are not inspired to act on reason alone. Using conventional rhetoric — which, in the business world, usually consists of a PowerPoint presentation where you say, “Here is our company’s biggest challenge, and here’s what we need to do to prosper,” building your case through statistics, facts and quotes from authorities — doesn’t connect with your audience. The problem with such rhetoric is twofold. First, the people you are talking to have their own set of authorities, statistics and experiences; so, while you are trying to persuade them, they are arguing with you in their heads instead of being motivated to reach certain goals. Second, if you do succeed in persuading the people you're talking to, you’ve only done so at an intellectual level, and that’s not good enough. The theory of rational action that claims human beings are abstract symbol manipulators (much like computers that seek to maximize their self-interest) has dominated most of the 20th century and is the foundation for major institutions, from stock markets to governments. Over the last couple of years, research has led to a profound shift in how we understand human thought and behavior. Scientists have pieced together enough evidence to know that humans are embodied beings, which means we work the way we do because of the kinds of brains we have, the kinds of bodies we have and the typical experiences that pervade our evolutionary history. We know now how real human nature works (mostly). The big picture is that we are profoundly moral beings; our behavior is shaped by value judgments, deeply held beliefs and assertions about right and wrong. We are profoundly social beings; our behavior is influenced by the behavior of those around us through shared stories, common expectations and need for cooperation (and competition). We make decisions through context-based logic determined by how we understand the situations we find ourselves in and reasoning with our emotions. Try asking someone on a date without those subtle emotional cues of presence, enthusiasm and appeal. See also: Hacking the Human: Social Engineering   The speed camera lottery I believe something as simple as fun can influence human behavior for the better. In a series of experiments, Volkswagen tested this theory. Can we get people to obey the speed limit by making it fun to do so? The winning idea was so good that Volkswagen, together with the Swedish National Society for Road Safety, actually made this innovative idea a reality in Stockholm. Check it out... Piano Stairs Can we get more people to take the stairs instead of the escalators by making it fun to do so? Piano stairs created on Odenplan underground station in Stockholm have become a hit in cities worldwide — from Milan to Santiago, Chile, and more. See also: LiveMed Brings Digital Human Touch   The way to persuade people is by uniting an idea with an emotion. It comes down to good design in our attempts to change human behavior and will depend on our understanding of REAL human nature. We can engage and design models to promote socially desirable outcomes such as the reduction of environmental impact and greater sensitivity to the needs of others.