Insurance Premium Tax Assignments
U.S. insurance is big business, with premiums for Life and Property and Casualty lines almost doubling in the last 10 years to over $950 billion. 1 As the U.S. insurance industry continues to grow about a third of the world s total 2 the taxes paid on premiums by insurers to states and municipalities have grown as well. Insurers paid more than $13.8 billion in state premium taxes in 2004, providing more revenue to states than property or tobacco taxes. 3 In California, in fact, the gross premium tax on insurers is the fourth largest source of general fund tax revenues behind only personal income, sales and general corporate taxes. 4 With so much at stake, it s important that these taxes are assigned correctly and equitably. Unfortunately, however, premium tax assignments and regulations vary from state to state, and change frequently. For insurers, this can be a critical business issue without the proper strategies, mistakes in assignments can result in overpayment of taxes and regulatory noncompliance. This paper addresses the avoidable drain on insurance companies in collecting improper premium taxes required by some state and local governments and outlines new methodologies being used within the industry for accurate, up-to-date tax jurisdiction assignments. THE PROBLEM WITH ZIP CODES The ZIP Code is a postal delivery system created by the U.S. Post Office in 1963 5 that insurance companies have overwhelmingly relied on to establish and determine territory assignments. 6 Seemingly simple to use, however, Zip Codes have inherent characteristics and limitations that cause ongoing and expensive problems. Typically, most insurance companies use ZIP Codes to assign applicable tax jurisdictions. However, most state and local premium tax assignments throughout the U.S. are based on specially defined boundaries that don t necessarily match municipal or ZIP Code boundaries. The primary problem stems from the fact that ZIP Codes were created solely for the convenience of expediting mail delivery, not as a foundation for establishing insurance territories or premium taxes. And while ZIP Codes may account somewhat for population, they ignore the key demographic and physiographic information that is critical to proper premium pricing. THE CHALLENGE Premium tax jurisdictions are established by a number of states and local municipalities. In many cases, they are complex and rapidly changing. These complexities and inconsistencies in the assignment of tax jurisdictions not only challenge the ability of an insurance company to accurately assess the correct tax, they also fuel errors resulting in overpayment and underpayment of taxes. 1 Facts and Statistics Insurance Information Institute http://www.iii.org/media/facts/statsbyissue/industry/ 2 Facts and Statistics Insurance Information Institute http://www.iii.org/media/facts/statsbyissue/industry/ 3 Property-Casualty Insurance and the U.S. Economy, A/A Advocate, American Insurance Association,Oct 7, 2005, p.2. 4 Property-Casualty Insurance and the U.S. Economy, A/A Advocate, American Insurance Association,Oct 7, 2005, p.2. 5 History of U.S. Postal Service, USPS, http://www.usps.com/history/his2_75.htm 6 Lot 54 Where are You? Pitney Bowes Group 1 Software, p.4. 2
Insurance As a result, ZIP Codes don t always correspond to the physical addresses necessary for accurate territory assignments. Boundaries shift frequently (see Figure 1a and 1b), and of the 40 million U.S. ZIP+4 Codes, 600,000 experience changes in names and boundaries each month. 7 Figure 1 Example of ZIP Code TM changes THE COMPLEXITY OF STATE AND LOCAL GOVERNMENT ASSIGNMENTS Further complicating the landscape, some states require that insurance premium districts correspond not just to ZIP Code TM requirements, but to political or census boundaries as well, which ebb and flow along with local populations. They may even be based on police or fire districts (as in states like Florida) resulting in still more territory assignment errors. 8 Of the 20,000 municipalities across the U.S., approximately 30% of ZIP Codes TM are in conflict with municipal, county and even state boundaries, 9 resulting in improper taxes being charged where, in fact, none are due (see Figure 2). They also often lag rapid development, failing to include, for example, entirely new sub-divisions. Figure 1a ZIP Code 60544 in 2005 Figure 2: ZIP Code Boundaries and Municipal Boundaries: Overlapping inconsistencies, Columbus, Ohio 10 Figure 1b. - ZIP Code 60544 splits into 3 ZIP Codes in 2006 Note that the three new ZIP Codes do not align evenly with the original ZIP Code boundary. Portions of neighboring ZIP Codes have either been included or removed from the area that constituted what used to be ZIP Code 60544. 7 Lot 54 Where are You? Pitney Bowes Group 1 Software, p.4. 8 Lot 54 Where are You? Pitney Bowes Group 1 Software, p.4. 9 Bruce Shutan, Group 1 Software s Latest GeoTAX application holds promise for rating tax territories 10 High Definition Data for Premium TAX Determinations, Pitney Bowes Group 1 Software, Dec 2004 11 High Definition Data for Premium TAX Determinations, Pitney Bowes Group 1 Software, Dec 2004 For individuals responsible for establishing territories and evaluating premium tax rates, the result of these inconsistencies is eye-opening: between 6% to over 25% of all territory assignments are incorrect. 11 Quite simply, the current system is neither accurate nor efficient and insurance companies are paying the price through pervasive errors that negatively impact tax determination and increase the 3
potential for state compliance problems. They are costly for insurance companies, and not just because insurance companies are often overpaying taxes premium tax assignments are also igniting expensive litigation and causing severe damage to relationships with customers. In a recently filed class-action lawsuit in Kentucky, for example, plaintiffs claim 13 companies wrongly charged insurance premium taxes based on incorrect tax jurisdiction assignments. In citing municipal tax overcharges by the insurance companies, the complaint alleges, it is imperative that the Defendants identify the specific county, city, or place in which the risk is located if Defendant is going to assess a local government premium tax to its customers practices of charging customers for taxes and collection fees that are not owed violate the laws of the Commonwealth of Kentucky. 12 Interestingly, the insurance companies in Kentucky that used GeoTAX TM software (see details below) were not among the entities sued. Business Geographics Business Geographics utilize technology-based Geographical Information Systems (GIS) tools that combine layers of geographic data to provide a better understanding of a physical location. They combine geocoding, the assignment of latitude and longitude to address locations, and spatial analysis, the assignment of territories, to map rich sets of data for use in such far-ranging activities as census gathering, disaster preparedness, fire services, health services, sanitation, transportation, economic development, housing, land use and assessments. 13 Business, banking, commercial and residential construction, real estate, and governments at all levels are using this data to correct inaccuracies and inefficiencies resulting from errorprone ZIP Code-based and municipal assignments. Insurance companies are also using business geographics to more accurately assign premium tax jurisdictions. 14 THE SOLUTION Leading insurance companies and state and local governments are partnering to realize fair and equitable premium tax solutions that benefit insurance companies, state and local governments and taxpayers. On the civic side, new laws, for example, are mandating due diligence and higher standards for tax assignments. For insurers, there are new methodologies for assigning correct tax jurisdictions using accurate address information, most notably in the area known as Business Geographics. Geocoding and Spatial Analysis One of the primary functions of Business Geographics is to match customer addresses with local boundary information. For insurance companies, geocoding and spatial analysis software has been specifically designed to help them quickly and more accurately assign the correct jurisdiction for any given address and also more accurately assign appropriate premiums and associated taxes to territories throughout the United States. A critical aspect of this technology is to allow companies to perform this analysis on-the-fly rather than on an infrequent schedule, enabling these decisions to be made and updated in real-time. 12 Kendrick et al vs. Standard Fire Insurance Company el al, Kenton District Court Division ii, Case No. 06-C1-02229, filed 07/14/06 13 The Public Health Disparities Geocoding Project Monograph Harvard University. http://www.hsph.harvard.edu/thegeocodingproject/webpage/monograph/geocoding.html 14 The Public Health Disparities Geocoding Project Monograph Harvard University. http://www.hsph.harvard.edu/thegeocodingproject/webpage/monograph/geocoding.html 4
Insurance By implementing a business geographics approach, insurers have the ability to: Correct premium tax territory assignments to reduce over and undercharging of premium taxes and help ensure compliance with applicable state insurance laws Perform premium tax assignment in real-time Greatly reduce human error during address entry Execute batch geocoding and spatial processes to benefit back-end renewal processes and deliver more consistent territory assignments Identify non-residential addresses, such as Rural Route addresses, and assign the residential address Generate What if scenarios that calculate and calibrate by territory and degree of exposure levels by insurance product line Spatial Analysis When the correct latitude and longitude has been obtained, Spatial Analysis is performed on this coordinate information by business geographic tools to determine territory information, and proximity to the correct premium tax jurisdiction. Figure 3 illustrates how the Spatial Analysis occurs using multiple types of geographic risks: Figure 3 - Spatial Analysis on Multiple Layers of Geography BUSINESS SOLUTIONS Matching physical address information to exact longitude and latitude coordinates gives an exact location as shown in the example below. User Input: 4383 Apple Boulder CO 80303 Standardized Output: 4383 Apple Ct Boulder CO 80301-1745 -105.248599, 40.054337 Territory 435 Note: The returned longitude and latitude coordinates and the assigned territory are shown for illustration purposes. 5
ARCHITECTURE Many companies offer geocoding and spatial analysis tools. There are only a few, however, that offer an entire suite of products that can address the unique requirements of insurance companies and state and local governments. Pitney Bowes Group 1 Software is a major player in this industry, specialized in mailing applications, address management and geocoding software for over 25 years. Pitney Bowes provides industry-leading technologies that allow insurance companies to cleanse and enrich their data, generate personalized customer communications and integrate and deliver data across the enterprise. Pitney Bowes Group 1 Software works closely with best-ofbreed data providers and mapping companies to offer superior address standardization and geocoding. With more than 600,000 hours of R&D invested in geocoding, Pitney Bowes solutions produce algorithms and geocoding methodologies that are unique to the marketplace generating true customer intelligence. Where traditional geocoding engines use only one reference file to match the input address, Pitney Bowes Group 1 Software adds another dimension by merging (conflation) two separate data sets USPS addresses and geographic street network data. By conflating data, geocoding can locate valid addresses that are not in the USPS database. special tax jurisdiction information to customer address records. It also provides access to the most currently available taxation boundary information through a data update process that continually tracks and updates taxation boundaries nationwide. Most Current Municipal Boundaries GeoTAX users have access to Tele Atlas's Dynamap/Municipal Boundaries database, the most current and accurate information regarding municipal tax boundaries nationwide. This database provides the most up-to-date information on the legal boundaries of incorporated places, with updates on governmental boundary changes from new incorporations, annexations, de-annexations, mergers, consolidations, or dissolution of corporations or local governmental entities. Local tax geography does not solely encompass municipalities, but also includes premium tax districts. These tax districts are not monitored by the U.S. census or any governmental body. Pitney Bowes Group 1 Software creates and maintains these premium tax district boundaries, updating them on a semiannual basis. GeoTAX is the most accurate method to match an address and determine whether it is inside or outside of a premium tax district. Thereby removing another, often troubling, area of local tax jurisdiction concern. GeoTAX TM GeoTAX is a comprehensive solution designed by Pitney Bowes specifically for tax applications. GeoTAX standardizes addresses and appends state, county, municipal place and 6
Insurance Standardizes and Validate Addresses GeoTAX processing begins with standardization of address records. GeoTAX determines if the address is complete according to official standards and adds a ZIP+4 Code to addresses. Consequently, the accuracy of the resulting geocode and the jurisdiction that is derived from it are optimized. Delivers Proprietary Codes Utilized by Major Tax Compliance Vendors By converting the FIPS output to a format that conforms to the required input used by tax compliance vendors, GeoTAX gives you a complete solution that can be quickly and easily integrated with these technologies. Runs in Batch, Interactive and Client-Server Modes or Via Hosted Service CONCLUSION Business Geographics technology offers insurers and state and local governments significant and measurable alternatives to manual determination of premium tax assignments based on manual determination, ZIP Codes TM and other parameters. Along the way, they can also improve customer retention, save money and streamline operations. Importantly, switching to an address-based territory assignment and Business Geographics model does not require a major change to an insurance company s existing Information Technology architecture. Software systems offered by leading companies like Pitney Bowes are specifically designed to work within an existing operation reducing implementation time and of course, costs. Forward thinking companies have already adopted this competitive advantage and are realizing great results. To find out more, contact Pitney Bowes Group 1 Software at 1-888-413-6763 or visit www.g1.com. GeoTAX is available in client/server and interactive, webenabled versions. Additionally, organizations can utilize GeoTAX through HotData, Pitney Bowes Group 1 Software's hosted service. 7
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