Solertia’s Oratore: Tax liability landscape shifts in US as AI leads to more aggressive audits

An influx of capacity driven by a slowdown in M&A activity has led to softening in the tax liability insurance market, according to Vincent Oratore, director at specialist underwriting agency Solertia Insurance.

Oratore said the reduction in M&A activity had prompted insurers in the sector to move their capital into the adjacent area of tax liability insurance.

"It's currently a soft point in the cycle because of the influx of participants... due to the decline in M&A activity and its impact on warranty and indemnity entering the market", explained Oratore.

This softening has seen underwriters willing to offer large limits of up to $1.1bn, with premiums dropping to as low as 1 percent of the total cover.

"We've witnessed significant reductions in premium prices this year due to the multitude of new entrants," Oratore told The Insurer TV.

Oratore highlighted the need for underwriters to maintain discipline when offering these policies.

“You have to be pretty sure that there is no risk when you write one of these policies," he said.

He particularly stressed the necessity for caution in the US, where the Internal Revenue Service’s recent adoption of AI has led to more aggressive audits.

"If you're conducting due diligence on a transaction, you need to measure it against potential litigation. That should be the benchmark, considering that the audit rates in the US have typically been around 2 percent of returns in recent years.

“However, this landscape is changing rapidly, especially in the US, where digital and AI technologies are enhancing the ability to detect aggressive cases," noted Oratore.

Oratore highlighted the US as the jurisdiction where insurers who used models based on historical audit data were at the highest risk.

"While not as pronounced in other tax authorities, thematically, the situation remains similar. Revenue authorities, driven by the need to generate income, are notably more assertive,” he said

Growth in Asia dependent on courts

While traditional markets like Europe and America have shown strong growth in tax liability insurance, Oratore also saw the potential for Asia to experience "sporadically significant" growth.

According to Oratore, the reason why this growth is likely to be sporadic is that it hinges heavily on the integrity of a nation's court system and the availability of legal talent.

“Ultimately, if it comes to it, we're going to succeed or fail in court,” he said.

For example, he regarded India as having a conducive environment for tax liability insurance due to “a very good bench of lawyers” and “a very reliable court system”.

However, issues regarding the reliability of the legal system have restricted the product's footprint in China

“There are issues with tax payer versus tax authority case law in China. What I would say is to do business in China, you need to have a very clear case, you need to have a position where the tax authorities have issued practices, which make it very, very clear what the treatment will be. Because if that's the case, they tend not to move away from that. So the answer is yes. But in very specific cases.”

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