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Obama reinsurance tax could make terrorism insurance scarce, RIMS head says

A proposal in US President Barack Obama’s 2014 budget has sparked more opposition this week — this time from two insurance industry organisations that say the proposal “violates a long-standing US tax policy” and would boost prices for terrorism coverage and property-casualty coverage overall.

According to a US Treasury Department document, the Obama administration’s revenue-raising proposal seeks to “deny an insurance company a deduction for premiums and other amounts paid to affiliated foreign companies with respect to reinsurance of property and casualty risks to the extent that the foreign reinsurer (or its parent company) is not subject to US income tax with respect to the premiums received.”

But the proposal has incurred more opposition this week from two organisations that say the proposal, if enacted, would only hurt the American consumer.

The Captive Insurance Companies Association (CICA) this week threw its support behind the Coalition for Competitive Insurance Rates (CCIR) — a group of individuals and organisations that spoke out against the proposal last week when the FY2014 budget was first released calling it a “protectionist” move that will “drive up the cost of insurance” for American consumers.

The CCIR, of which the Association of Bermuda Insurers and Reinsurers (ABIR) is a member, called the proposal “a major threat to homeowners and small businesses in disaster-prone states”.

The CICA has signalled its opposition to the budget by co-signing a letter from the CCIR to US legislators. The letter argues that the reinsurance business model is resilient and should not be compromised and that the proposal “violates a long-standing US tax policy”.

The letter reads: “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 ultimately damage relationships with important US trading partners.”

The letter also maintains that US consumers with great exposure to natural disasters like hurricanes in Florida and California earthquakes will suffer from added costs.

“As lawmakers continue to fight for aid to help rebuild from Hurricane Sandy and support farmers devastated by the drought, the US needs a robust insurance market that is open to as many competitors as possible and encourages foreign and direct investment,” the letter reads. “We urge you to oppose this proposal that is supported by a small group of self-interested US insurance companies.”

The head of the Risk and Insurance Management Society (RIMS) this week also spoke out about President Obama’s proposed reinsurance tax, saying it would force insurers to charge more and cut the availability of property-casualty coverage for American businesses.

“The availability of coverage would be reduced and costs for [corporate] consumers would increase significantly, particularly in urban areas subject to terrorism risk and areas prone to natural disasters,” RIMS president John Phelps wrote in a letter delivered to the US House Ways and Means Committee’s International Tax Reform Working Group.

That letter, which arrived on the same day two explosions killed three people and critically injured dozens more at the Boston Marathon, stressed that this proposed reinsurance tax could make terrorism insurance, and other critical types of coverage, scarce for American companies and consumers.

Widely used by the property and casualty insurance industry, the use of foreign reinsurance by domestic carriers is an “efficient mechanism to pool risks, diversify exposures, reduce the volatility of losses, and as a result, enhance availability of coverage and reduce prices for consumers,” Mr Phelps explained.

“Throughout the recent series of natural catastrophic events, and the terrorist attacks on 9/11 foreign reinsurers have filled gaps in coverage where domestic insurers either discontinued or severely curtailed coverage or significantly increased rates,” the RIMS president added.

Mr Phelps says that besides the toll the tax will have on corporate and individual insurance buyers in urban areas with particular exposure to terrorism risk, “the bulk of the increased cost will be imposed on the coastal states that are stripped of the benefits from foreign reinsurance’s impact on the availability of affordable coverage,” he wrote.

RIMS, whose annual convention started in Los Angeles on Sunday, consists of corporate risk managers and insurance professionals, has 10,000 members worldwide, including 80 percent of Fortune 500 companies. Most Fortune 500 companies own captive insurance companies — offshore and onshore entities that enable corporations to lower their risk-funding costs by buying reinsurance, which is typically cheaper than insurance.

Terrorism coverage: Some in the insurance industry say President Obama's proposed tax on reinsurers could make insurance coverage for terrorist acts like the Boston Marathon bombings scarce.

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Published April 23, 2013 at 9:00 am (Updated April 22, 2013 at 7:28 pm)

Obama reinsurance tax could make terrorism insurance scarce, RIMS head says

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