Legislation to tax Bermuda reinsurers resurrected in US Congress
The offshore reinsurance tax debate has been revived with the introduction of two new bills in the US Congress.
Two American lawmakers have reintroduced legislation that would end a tax break they say favours foreign insurers — including those based in Bermuda — over US insurers.
Congressman Richard Neal, the ranking Democrat on the House Ways and Means Select Revenue Subcommittee and Senator Robert Menendez, a Democrat on the Senate Finance Committee, introduced bills in both the House and the Senate last week aimed at preventing non-US based insurers operating in the US from reducing their US tax bill by reinsuring with their non-US affiliates.
“Many foreign-based insurance companies are using affiliate reinsurance to shift their US reserves into tax havens overseas, thereby avoiding US tax on their investment income,” Congressman Neal said. “This provides these companies with a significant unfair competitive advantage over US based companies, which must pay tax on their investment income.”
“That is why I am filing legislation to end the Bermuda reinsurance loophole. Ending this unintended tax subsidy for foreign insurance companies will stop the capital flight at the expense of American taxpayers and restore competitive balance for domestic companies. It simply reinforces my efforts to combat offshore tax avoidance,” the congressman added.
The legislation closely resembles legislation Congressman Neal first introduced in the House in 2008 and again in 2009. It was later reintroduced in 2010 with the added sponsorship of Sen Menendez. But the legislation failed, as have Congressman Neal’s other efforts to close what he, and a number of US insurers, see as a loophole that allows reinsurers, mainly based in Bermuda, to dodge US taxes.
A similar proposal is included in President Barack Obama’s 2014 budget.
Under current law, property and casualty insurers are allowed a deduction for premiums paid for reinsurance — that is, insurance for insurance companies — if the reinsurer is an affiliate not based in the US.
In essence, the Neal-Menendez legislation defers the tax deduction for premiums paid to an offshore affiliate until the insured event occurs. That effectively restricts any benefit a company would gain by shifting reserves and associated investment income overseas and is modelled after the Obama administration’s budget proposal.
The Coalition for a Domestic Insurance Industry, led by US insurers, WR Berkley and Chubb said in a statement that the bills’ sponsors worked with tax experts at the Treasury Department and the Joint Tax committee in drafting the bill.
“We urge Congress to swiftly adopt the proposed legislation. Congress never intended to give a preference to foreign-controlled insurers over their domestic competitors,” said WR Berkley, chairman and CEO of WR Berkley Corporation.
“Closing unintended loopholes to recover lost revenue is one of the best ways to offset the cost of needed tax reform,” he said.
“The increasing trend of foreign insurance companies moving profits made in America offshore and sticking Americans with the bill is incredibly troubling,” said Sen Menendez. “This legislation will staunch the flow of capital overseas, protect American jobs, and reduce deficits by shutting down a tax loophole that provides a huge unintended subsidy to foreign companies at the expense of both their US competitors and American taxpayers,” he said.
But opponents contend the bill would do serious damage to the US property and casualty insurance markets, while also violating international commitments made to trading partners.
A group representing the reinsurance industry, the Coalition for Competitive Insurance Rates (CCIR), is objecting to the proposed legislation, arguing that it would increase costs and limit coverage availability for American consumers.
“The legislation introduced closely mirrors thinking we have seen time and again from the Obama Administration and Congress,” said Bill Newton, executive director of the Florida Consumer Action Network. “Our concerns remain the same: instituting a tax on foreign affiliate reinsurance would only result in a more limited US domestic insurance capacity and more expensive insurance coverage, a major threat to homeowners and small businesses whether they are in Florida, Massachusetts, New Jersey or elsewhere, but particularly those in states that are historically susceptible to natural disaster.
Approximately two-thirds of all reinsurance coverage currently required to protect American homes and businesses is provided by non-US reinsurance companies. In Florida, less than ten percent of that reinsurance comes from US companies — with the rest coming from foreign affiliates — 62 percent of them right here in Bermuda.
Estimated losses from Hurricane Sandy currently stand at more than $19 billion and may reach $25 billion. International insurance companies are expected to cover nearly 50 percent of the losses caused by the storm, the CCIR says.
“This legislation would shift the financial burden of rebuilding following a disaster onto already strained domestic insurers and their policyholders,” said James Donelon, the Louisiana commissioner of insurance. “As we enter the 2013 tornado and hurricane seasons, we need Congress and the President working on legislation to aid rebuild efforts, not hinder them with avoidable economic challenges.”
Carolyn Shaw, Risk and Insurance Management Society (RIMS) board liaison to the society’s external affairs committee international reinsurers are essential to the US insurance markets — able to fill gaps in coverage while domestic insurers are coping with an influx of claims following a disaster.
“This short-sighted legislation fails to realise that if organisations are forced to abandon their offshore counterparts, the financial burden would fall on government and policyholders — an alternative that could shatter this country’s economic vitality,” Ms Shaw said.
RIMS president John Phelps says 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.”
He says the proposed legislation would make critical types of coverage, scarce for American companies and consumers.
“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,” Mr Phelps said.
In an economic impact study of the Neal-Menendez bill, the Brattle Group, an economic consulting firm, found that the proposed tax would reduce the net supply of reinsurance in the US by 20 percent — which would raise rates.
The Association of Bermuda Insurers and Reinsurers (ABIR), which represents 22 of the world’s largest international re/insurers is a member of the CCIR. Brad Kading, ABIR’s president and executive director, has been lobbying on Capitol Hill against the Neal Bill for more than six years now. He says the proposed legislation would take away reinsurers’ ability to diversify and spread risk.
“Affiliate reinsurance is a fundamental component of insurance group operations,” Mr Kading said. “US and non-US insurers use affiliate reinsurance to spread risk and match capital with risk — this helps generate capacity to meet client needs. You can’t do business without it.”
RJ Lehmann, a fellow with the R Street Institute, a non-profit policy research organisation, says in the end, the legislation would only benefit a small group of US insurance companies at the expense of American consumers.
“This is a protectionist measure that serves the interests of certain large domestic insurance companies by discouraging foreign-based competitors from devoting their capital to US risks.
“It also is simply bad policy, in that it would tend to concentrate US risks within the United States, rather than allowing the global reinsurance system to spread them throughout the globe,” he said.
Mr Lehmann also added that the legislation appears to violate the United States’ commitment under the General Agreement on Trade in Services not to subject companies to more punitive or burdensome taxation based solely on where the company is based.