Industry groups give thumbs down to Obama's reinsurance proposals
A Bermuda insurance industry representative yesterday said the Obama administration's budget plans to increase taxes on some forms of reinsurance highlighted "a failure to understand insurance risk management".
Bradley Kading, president of the Association of Bermuda Insurers and Reinsurers (ABIR), was responding to Monday's proposals that could raise the effective tax rate of Bermuda insurance groups with US subsidiaries and scale back a US federal backstop for terrorism insurance (TRIA).
An industry expert from ratings agency AM Best said that if the plans are enacted, the Bermuda market is likely to become "less competitive" because prices would have to rise to absorb the additional tax bill.
United Bermuda Party MP and former Finance Minister Grant Gibbons said the President's proposals would diminish Bermuda's appeal as a place to do business and he criticised the Bermuda Government's "inconsistent commitment" to lobbying of US lawmakers.
US consumer group the Risk and Insurance Managers Society (RIMS), whose membership is primarily corporate insurance buyers, said the proposal would increase the cost of insurance premiums.
Finance Minister Paula Cox was travelling yesterday and unavailable for comment.
"The Obama administration's budget cuts back on the federal government's terrorism risk insurance programme, citing the ability of the private sector to provide more coverage," Mr. Kading said.
"At the same time, by attacking affiliated reinsurance, the administration's budget undermines the ability of those insurance groups to manage additional terrorism risk.
"As we've said all along, affiliated reinsurance helps manage volatile, catastrophic insurance risk. It's unfortunately an example of the failure to understand insurance risk management.
"On the other hand, it is somewhat heartening that the administration did not endorse the Neal bill's provisions on affiliated reinsurance which have been advocated by a small group of US insurers advancing their protectionist interests."
As for the impact on the Bermuda market, Mr. Kading said: "Much work remains to be done on this issue in 2010 and it is not possible to predict the outcome."
The Obama proposal would have a significantly lighter impact on the non-US insurance industry than would the Neal bill. While the Neal legislation aims to raise $2 billion a year in extra tax revenue, the Obama proposal's goal is $500 million over ten years.
Also the Obama proposal appears to allow up to 50 percent of the US subsidiaries' premiums in any one line of business to be ceded to the affiliated reinsurers without penalty.
The change in the tax policy would apply to all non-US companies - meaning that a Bermuda company looking to escape the tax impact could not do so by redomiciling in another jurisdiction.
Two insurance experts from ratings agency AM Best, John Andre, group vice-president for global reinsurance ratings, and senior analyst Peter Dickie, said there was uncertainty about what would happen.
All non-US companies who provided reinsurance to their US subsidiaries [EmDash] including some leading Bermuda reinsurers could be affected, they said.
"When you have to take out money to pay more taxes, then there will be a reduction in capacity," Mr. Andre said. "Prices will also increase in Bermuda to cover that cost and that will make Bermuda less competitive."
Mr. Dickie said the scaling back of TRIA could impact some companies' all-important credit rating.
"For primary insurance companies, the TRIA backstop is in important part of their rating," he said. "Without TRIA, they would have to go out and find some other form of backstop. In effect, it could put pressure on their rating."
He added that many Bermuda companies write some terrorism business, but not as a substantial portion of their books.
The Terrorism Risk Insurance Act of 2002 established the US Government backstop, which would be triggered only by a truly catastrophic event. The act ensured terrorism coverage remained available in the aftermath of the 9/11 attacks. It was renewed in 2007 for seven years.
The budget documents released on Monday state the proposal would eliminate "nearly $250 million in federal subsidies to insurance companies for terrorism insurance. These subsidies [JUMP]<*t(0,0," ")>
The plan would decrease financial support for insurers participating in the programme, starting next year. It would also eliminate coverage for acts of domestic terrorism.
Industry sources said the reason terrorism rates are affordable is the existence of TRIA.
The UBP's Grant Gibbons, standing in for Shadow Finance Minister Bob Richards, said the proposals were a cause for concern, but not surprising, given the huge US government deficit.
"If the proposed tax change is retained as part of the final US budget package later this year, it would undermine an important tax advantage and diminish Bermuda's appeal as a place to do business for insurance groups with US subsidiaries [EmDash] a key component of the island's international business sector," Dr. Gibbons said.
"Given the broader economic challenges we face, any initiatives which threaten the stability of the major leg of Bermuda's economy should be viewed with real concern.
"It is why we have voiced such strong criticism of this Government's antagonistic record with international business, as well as its tourism failures and its mismanagement of the public purse. In these and other areas Bermuda is performing less well than it once did, and this makes for an economy less able to absorb the kind of threat posed by the US President's budget plan.
"We are also very concerned with the Government's inconsistent commitment to ensuring the island has the best possible relationship with Washington lawmakers. Its superficial approach to our most important international relationship was revealed in the splashy 2009 'opening' of Bermuda's Washington DC office which was followed by the failure to actually staff the operation. The office sits empty today."
US-based RIMS said the proposal to close the tax loophole would cost US consumers many times more in higher insurance premiums than it would gain for the US Treasury.
RIMS added that the proposal "would have a chilling effect on these insurers and reinsurers who provide an important safety valve in many areas of the country".
RIMS secretary Scott Clark said quoted an economic study of the similar proposals outlined in the Neal bill that claimed it would cost consumers $10 billion to $12 billion a year. "This far exceeds the revenue estimate of $233 million savings the administration is projecting over five years at a far greater cost to individual policy holders and businesses of all types and sizes," said Clark.
Like ABIR, Mr. Clark said the budget proposals were contradictory, in that they required the reinsurance industry to take on more terrorism risk, while effectively reducing its ability to provide the necessary capacity.
Non-US insurers paid 64 percent of claims resulting from 2001 terrorist attacks on New York and Washington, DC, he noted.
Both RIMS and ABIR are members of the Coalition For Competitive Insurance Rates, which put out a statement last night describing the President's proposals as "disappointing".
Mr. Kading said: "Targeting this vital part of our insurance infrastructure puts at risk insurance support for families, large and small businesses, and farmers that are key to America's economic recovery." The proposal was "inconsistent with the principles of sound insurance risk management", he added.
Bill Newton, executive director of the Florida Consumer Action Network, said: "US consumers, whether they know it or not, rely on the international insurance market to protect their homes and businesses. Given today's financial and economic conditions, now is certainly not the time to make access to insurance more costly."
