A string of companies with Bermuda bases, together with the Association of Bermuda Insurers and Reinsurers (ABIR), have attacked president Barack Obama’s budget proposal to deny tax deductions for reinsurance premiums paid to foreign affiliates.

Now — under the banner of the Coalition for Competitive Insurance Rates — they have written to influential US Senate finance committee members to urge them to reject the proposals.

The move could hit Bermuda reinsurers doing business with US firms and make their operations less attractive.

The letter to four Senators said: “The president’s proposed tax on foreign affiliate reinsurance would only serve to limit US insurance capacity and drive up the cost of insurance, compelling homeowners and small businesses, particularly those in disaster-prone states, to shoulder the burden of this anti-competitive tax.”

The letter added: “In effect, this is designed to punish international insurers by imposing additional taxes on their US operations.

“It essentially imposes an isolationist tariff on international insurance companies conducting business in the US, ultimately denying them a key risk-management tool everyone else uses.

“They would have to either replace affiliate reinsurance with non-affiliate reinsurance or raise more capital.

“This would force the industry as a whole to reduce the size and scope of their US offerings to fit with their existing subsidiary capital bases.”

And the letter, signed by the US arms of major firms like ACE, XL, Arch, Argo, Zurich and Swiss Re, would breach long-standing US tax policy that dictates an “an arms-length standard for related party, cross-border dealings.

It added: “The changes proposed are contrary to decades of US tax and trade policy and inconsistent with existing US tax-treaty obligations.

“They could spur retaliatory actions by other countries and possibly damage relationships with important US trading partners.”

The letter argued the proposed changes, which would have to be agreed by the Republican-controlled Senate and House of Representatives, broke World Trade Organisation (WTO) commitments.

It said: “One of the basic principles of the WTO is that a country cannot treat a foreign company worse than it treats its own companies. These proposals clearly single out foreign reinsurers for treatment worse than US reinsurers. Specifically, they subject foreign reinsurers — but not US reinsurers — to an arbitrary test to limit the tax deductibility of reinsurance premiums paid to them by their US-based affiliates.

“Just as foreign countries cannot protect their insurance markets for domestic insurance companies and treat US companies unfairly, the US cannot protect the US market for domestic insurance companies and treat foreign companies unfairly.”

And the letter warned: “The European Union and individual countries like the United Kingdom, Switzerland and Germany have asserted that this tax would violate WTO commitments and tax treaties.”

It added: “In today’s fragile economy, the administration and Congress should avoid imposing new tariffs on the business transactions of US insurance subsidiaries of non-US insurers, which are already taxed under the US corporate income tax and a federal excise tax.”

Neither Finance Minister Bob Richards nor new Association of Bermuda International Companies (ABIC) president Patrick Tannock responded to requests for comment yesterday.