On a Schweser Mock exam (book 2, exam 1, afternoon question 14), it said that for both life insurance and property and casualty companies, the return up until the acctuarial rate is tax free.
I thought this statement was false because of the property and casualty part. I know that life insurance is tax free until the credit rate. However, I read that non-life insurance companies do not have the same benefit.
I went to the CFAI books, Reading 15, and I looked under the Tax considerations for both life insurance and non-life insurance companies. Under tax considerations for life insurance, it does mention the tax free nature of returns up until the acctuarial rate. For non life insurance, it does not mention that any returns are tax-exempt up to the credit rate.
Is this in fact an error by Schweser? Or am I skipping over something in the books?
For the life & annuity side, I can see where the earnings up to the actuarial rate are essentially tax free: the insurer still includes investment earnings in taxable income, but the change in policyholder liabilities on a tax basis implicitly deducts the rollup of liabilites at the actuarial rate.
On the other hand, most P&C coverages are short term in nature, so there’s really not much of an opportunity to gain investment earnings. As such, there’s really not much a need for an actuarial rate on the P&C side, except for some long-tailed business, e.g. workers’ comp disability payments. Just like the life insurers, I expect that the P&C insurers have to include investment income in taxable income. I do recall from LIII that P&C insurers shift in and out of tax-free municipals depending on how they expect underwriting losses/gains to emerge.