US President Barack Obama yesterday outlined plans in his federal budget proposal that would erode the tax advantage currently enjoyed by many Bermuda re/insurers.

Insurance groups with US subsidiaries, which cede some of the premiums earned in the US back to their parent companies in Bermuda in the form of reinsurance, can expect to see their effective US tax rates rise from 2011 if the plans become law.

The proposals do not single out Bermuda — they apply to all non-US insurance groups — but several of the Island's big employers could be impacted.

Companies such as XL Capital, Ace Ltd. and Arch Capital are among those considered by analysts to have most to lose.

The proposal resembles a bill launched last year in the US Congress by Representative Richard Neal to amend the tax code to impose tax on reinsurance premiums between related parties. The Neal bill was backed by the US domestic insurers, who want "a level playing field" in their competition with non-US insurers.

But the Bermuda Government and industry group the Association of Bermuda Insurers and Reinsurers (ABIR) have lobbied US lawmakers in recent years to dissuade such a move.

They have argued that the impact would be higher insurance bills for US consumers and could even result in some types of insurance becoming unobtainable, as capacity shrinks.

A report on the economic impact of the Neal bill, commissioned by non-US insurers and authored by the Brattle Group, concluded that US reinsurance capacity would fall 20 percent and US annual insurance costs would rise between $10 billion and $12 billion.

ABIR declined to comment on the Obama proposal last night. The organisation's president Brad Kading said a statement was scheduled for today.

The President's proposal seeks to generate revenue by denying US-based insurance companies a deduction for certain reinsurance premiums ceded to its offshore parent.

Reinsurance transactions with affiliates that are not subject to US federal income tax on insurance income can result in "substantial US tax advantages", according to the plan.

However, Bermuda and other non-US reinsurers do pay US excise tax of one percent on premiums ceded from US insurers. This tax "is not always sufficient to offset this tax advantage", the proposal stated.

"These tax advantages create incentives for foreign-owned domestic insurance companies to reinsure direct insurance of US risks with foreign affiliates to an extent that would not occur between unrelated parties acting at arm's length. It is inappropriate to allow a deduction for reinsurance premiums paid under such circumstances."

The proposal would only impact part of Bermuda insurers' tax advantage over their US rivals. The Island charges no tax on corporate profits, compared to a rate of around 35 percent in the US.

Analysis by credit rating agency Fitch Ratings found that, over the period from 2004 through September 2008, Bermuda re/insurers enjoyed an effective tax rate 18.2 percentage points lower than their US property and casualty competitors.

Citigroup analyst Joshua Shanker, who follows the Bermuda insurance industry, estimated in December 2008 that closing the "Bermuda loophole" might increase US revenue by around $200 million.

Mr. Shanker said the benefits of a tax code change would be "de minimus from an economic standpoint", but "it might make sense from a political standpoint".