Obama Budget Targets Overseas Tax Benefit

The Obama Administration has again revived its proposal to reduce the tax benefits foreign insurers receive by ceding US property and casualty premiums to their foreign affiliates operating from jurisdictions like Bermuda.

Industry journal “Property/Casualty 360″ reports the provision, contained in President Obama’s budget for 2014 unveiled on Wednesday [Apr. 10], has prompted a flurry of responses from US insurers who support the legislation — led by William R. Berkley, CEO W.R. Berkley Corp. — and challengers of the proposal.

Opponents include foreign insurers led by the Bermuda Association of Insurers and Reinsurers [ABIR] as well as a libertarian think tank and politicians representing the Gulf Coast and Atlantic Coast who fear the proposal would raise the cost of catastrophic coverage in their states.

“Property Casualty  360″ said “The provision would completely deny a business expense deduction by US insurers of premiums ceded to their foreign affiliates. The US affiliates would receive offsets against this taxable income for ceding commissions, returned premiums and recoverables under the proposal. It would apply to the US subsidiaries of all non-US insurers as in past.”

The provision in the 2014 Obama budget plan is consistent with, but not identical to, legislation dealing with the issue introduced during the last Congress in the Senate by New Jersey Senator Robert Menendez and in the House of Representatives by Massachusetts Congressman Richard Neal.

The legislation pits American insurers, led by W.R. Berkley and Chubb, against foreign writers, led by, but not limited to, Bermuda insurers and reinsurers.

Opponents have enlisted Swiss Re and other large European insurers and reinsurers in their fight against the tax.

R.J. Lehmann, a senior fellow at the R Street Group, a libertarian think tank, said in a statement that it “represents a protectionist and economically destructive tax that would benefit a small group of domestic insurance companies at the expense of US consumers.”

Mr. Lehmann said that the costs of the proposal “far exceed the revenue it would generate, and its ultimate effect would be to drive reinsurance capital — so sorely needed in catastrophe-prone states like Florida, Louisiana, Texas and California — out of the country.”

He said in addition to making reinsurance more costly and limiting access to the global reinsurance industry, which allows catastrophe insurance to function by pooling a wide variety of different kinds of risks from around the world, the proposal is unnecessary.

Cross-border reinsurance transactions are already subject to a tariff and the Internal Revenue Service has the authority to disallow any reinsurance transactions that don’t involve a genuine transfer of risk, he said.

“Targeting global insurance companies for discriminatory, punitive taxes would be disastrous for areas vulnerable to natural disasters,” said Bill Newton, executive director of the Florida Consumer Action Network, a member of the  Coalition for Competitive Insurance Rates [CCIR]—a lobby group created by Bermuda and other foreign insurers, and includes representatives of Gulf Coast states and the Risk and Insurance Management Society.

“Instituting this tax would significantly reduce the supply of reinsurance in the US, decrease America’s ability to manage volatile, catastrophic insurance risk, and would further burden American homeowners, large and small businesses and public sector organizations during these challenging economic times,” Mr. Newton said.

In February ABIR CEO Bradley Kading — referring to the multi-billion dollar claims emanating from damage last year’s “Super Storm” Sandy caused along the East Coast — underscored the need for a global presence in the US insurance market.

“Hurricane Sandy underscores the important role that international reinsurers play in times of crisis,” he said “Global reinsurers are financially strong and have substantial capacity to support US insurance companies as they review their portfolios in light of claims. In fact, Bermuda’s reinsurers are the largest suppliers of catastrophe reinsurance to US insurers and have an excellent record of claims payment. With the potential losses from extreme weather on the rise, the need for global reinsurance will continue to expand …

“… Given Bermuda’s location in hurricane alley, we sympathize with the residents of the East Coast who continue the rebuild from the devastation left by Hurricane Sandy. As we reflect on the disastrous events of last year and anticipate future catastrophes, it is clear that the nation needs a robust insurance market that is open to as many competitors as possible and encourages direct foreign investment. If perceptions of risk increase, or consumer demand is amplified, international reinsurers are ready to meet the market’s needs.”

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