‘Strenuous Objection’ To Obama Proposal

Revived measures in President Obama’s 2013 budget to forbid tax deductions for reinsurance premiums ceded to foreign-based affiliates including those operating in Bermuda has once again divided American industry groups.

Heavyweight domestic US insurers such as W.R. Berkley and Liberty Mutual are pleased with the proposal but other trade groups are objecting — including a leading American industry advocacy group backed by the Association of Bermuda Insurers & Reinsurers.

The administration’s budget proposal for 2013, issued on 13 February, argues that the status quo creates “an inappropriate incentive for foreign-owned domestic insurance companies to reinsure US risks with foreign affiliates”.

The Coalition for Competitive Insurance Rates [CCIR], the leading voice for continued and increased competition within the insurance industry, last week strenuously objected to the proposal to deny a tax deduction for certain reinsurance premiums paid to foreign-based affiliates by domestic insurers.

That measure, if adopted, would impact on the earnings of Bermuda-based subsidiaries of US firms. ABIR, the public policy arm of Bermuda’s reinsurance industry, is a member of the CCIR.

The president’s proposal comes on the heels of a record year when more than $105 billion insured catastrophe losses were incurred from natural disasters globally, 45 percent of which was paid by global reinsurers.

“2011 should serve as a wake-up call to those who wish to impose limits on global risk distribution via reinsurance,” said Dan Kugler, Board Liaison to the Risk and Insurance Management Society, Inc. [RIMS] External Affairs Committee. “The President’s proposal ignores the facts: instituting this tax would significantly reduce America’s ability to manage volatile, catastrophic insurance risk, and would further burden American homeowners, large and small businesses and public sector organisations during these challenging economic times.”

The president’s budget proposal closely resembles legislation introduced by Massachusett Representative Richard Neal and Senator Robert Menendez that threatens to drastically raise insurance rates across the country.

Congressman Richard Neal With President Obama and Congressional Minority Leader Nancy Pelosi

The Peterson Institute for International Economics recently published a policy brief, “Another Shot at Protection by Stealth: Using the Tax Law to Penalize Foreign Insurance Companies,” which criticises the Neal-Menendez bill, emphasizing that US consumers who live in disaster-prone areas would suffer at the hand of Congress.

Gary Clyde Hufbauer, author of the brief, writes, “There is no reason for the US Congress to go down the path of tax discrimination, harming relations with foreign partners and imposing additional costs on American consumers who live in high-risk areas. Instead, the US Congress should focus on corporate tax reform that puts US companies on the same competitive playing field as their foreign rivals.”

According to research conducted by a leading economic consulting firm, the Boston-based Brattle Group, states such as those on the Gulf of Mexico and California, which are most vulnerable to natural disasters, would be hardest hit by the proposed tax on overseas insurance and reinsurance companies. Hurricane Irene, for example, caused an estimated $5 billion in US insured losses according to the Insurance Information Institute.

Hurricanes Katrina, Rita and Wilma, in addition to other events, made 2005 a record year for the US, causing $90 billion in US insured catastrophe losses [updated in 2011 dollars].

Domestic private insurance and reinsurance markets depend on international reinsurance markets to manage the enormous US property catastrophe risk and to add to local capacity to meet consumer needs.

“This proposed tax would benefit a few insurance companies at the expense of their competitors while making insurance more costly for hard-pressed homeowners and small businesses,” said Bill Newton, executive director of the Florida Consumer Action Network. “If the supply of insurance is reduced, then the price for insurance will rise; it’s that simple. In today’s economy, the White House and Congress should avoid imposing enormous new tariffs on non-US insurers that will only serve to disproportionately burden consumers and businesses in states like Florida that are most vulnerable to natural disaster.”

In November 2011, Florida lawmakers sent a letter to the House Ways and Means Committee urging its members to oppose the establishment of a punitive tax on reinsurance that would, as the letter stated, “lead to higher premium costs for citizens of Florida, and the rest of the nation.”

The Boston-based Brattle Group found that the proposed tariff would slash the supply of reinsurance in this country by 20 percent, forcing Americans consumers to pay a total of $11 to $13 billion a year for the same coverage they currently have. The study further estimates that the price of insurance in this country would increase by 2.1 to 2.4 percent and as much as 9 percent in some lines of business.

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