Industry Journal: Bermuda Firms’ Coverage Vital
The latest flare-up in the long-running conflict between domestic US insurers and companies that write reinsurance in the American market from off-shore jurisdictions like Bermuda once again highlights the “vital” Property & Causualty coverage provided by overseas entities, “The Insurance Journal” reports today [Apr. 29].
The leading industry journal said the last time the subject was seriously considered was in 2010 when the House Ways and Means Committee considered HR3424, a bill introduced by Democratic Massachusetts Congressman Richard Neal to tax foreign-based insurers and reinsurers.
“It failed, as have Rep. Neal’s other efforts to right what he, and a number of US insurers, see as a loophole that allows the reinsurers, mainly based in Bermuda, to escape US taxes,” said business journalist Richard E. Boyle. “As a report from A.M. Best points out, however, the foreign reinsurers do pay a federal excise tax [FET] on the premiums they cede back to a ‘tax exempt country, which is usually Bermuda. The FET is four percent on P&C premiums and one percent on life premiums.”
The attempt to change those provisions recently resurfaced when it was included in President Obama’s proposed budget for 2014.
“If adopted, which at this point seems highly unlikely, the proposal would defer a tax deduction for reinsurance premiums paid to foreign affiliates by domestic insurers, thereby closing what proponents of the measure describe as a ‘tax loophole that costs the Treasury billions of dollars in tax revenues annually and provides foreign-based insurance groups a significant, unfair advantage over their US competitors’,” said Mr. Boyle.
Supporters of the Obama Administration’s proposal include the lobby group Coalition for a Domestic Insurance Industry [CDII] which cites William R. Berkley, chairman and CEO of W. R. Berkley Corporation, a coalition member, as asking: “Would Congress ever intentionally pass a tax subsidy only applicable to foreign-based companies? The answer is clearly no. At a time of burgeoning deficits and possible tax increases on US workers and businesses, it’s unfathomable that we would continue this unintended loophole allowing foreign-based insurers to avoid US tax on their US-based business.”
Characterising the ‘foreign-based insurers’ as tax avoiders, however, is a bit disingenuous said Mr. Boyle as it conjures up “visions of stealthy Swiss bankers and bowler hatted Englishmen poaching America’s righteous worth.”
He went on to point out the Bermuda-based entities are almost entirely American in origin, beginning with ACE and XL. The newer ones, and their founders and capital providers, created after the September 11 attacks, include the following:
- Endurance Specialty Insurance Limited – Aon and Zurich.
- Allied World Assurance Co. – AIG, Chubb, Goldman Sachs
- Axis Capital Holdings – Marsh’s Trident II Investment Trust, CSFB, The Blackstone Group, J.P. Morgan and Thomas Lee
- Arch Capital – Warburg Pincus and Hellman & Friedman private investment funds
- Montpelier Re – White Mountains Insurance Group and Benfield (now part of Aon)
- Platinum Underwriters – spun off from The St. Paul, as well as
- Harbor Point Limited, established in 2005 by Trident III, L.P., a private equity fund [set up by MMC Capital], now managed by Stone Point Capital, which acquired the ongoing business of Chubb Re, Inc. That somewhat explains why Chubb has taken a back seat in these discussions.
Bradley Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers [ABIR] has been in the forefront of those opposing any change in the tax laws for the last seven years. Addressing this current attempt, he described it as a “direct attack on the business models of international reinsurers.”
Mr. Boyle said: “Kading and the ABIR, in association with the Coalition for Competitive Insurance Rates (CCIR), have been making the same points in opposition to similar measures that have surfaced in four of the last five Obama budgets.
“Kading’s position takes into account the overall picture of international reinsurance, “for whom the ability to pool risk globally onto a central balance sheet is key,” he said,’In doing so, re/insurers are able to diversify their sources of risk, enabling them to write more capacity and ultimately helping the end consume.” The proposed changes in the tax law threaten to bring this to an end’ …”
Any change in the tax law would primarily affect P&C catastrophe reinsurers — companies that take on the risks of devastating disasters like Hurricane Katrina and Superstorm Sandy, as well as the tornadoes, earthquakes and brush fires that regularly strike parts of the US.
According to A.M Best, the US ”accounts for more than 70 percent of global cat risk, and foreign insurers and reinsurers absorb approximately 50 percent of the total losses on US cat events.”
“This coverage is vital, and it is likely to become more so in the future,” concluded Mr. Boyle. “It is hard to see where else it will come from other than those companies, which aren’t all that foreign, currently providing it, as only one large US reinsurer remains in the mix – General Re. Any significant decrease in capacity and/or increased reinsurance premiums would inevitably threaten the current balance, which, while by no means perfect, has served the US consumer quite well over the years.”
