House Bill Would Cap Deductions for Offshore Reinsurance

WASHINGTON, Sep 22, 2008 (A. M. Best via COMTEX) -- SAF | Quote | Chart | News | PowerRating -- Foreign insurers and reinsurers would be capped in deducting reinsurance premiums ceded from U.S. units to offshore affiliates, under legislation filed by U.S. Rep. Richard Neal, D-Mass.

The bill, H.R. 6969, would address concerns raised in the past year by members of the 14-member Coalition For a Domestic Insurance Industry, which includes such major U.S.-based property/casualty insurers as W.R. Berkley Corp., Berkshire Hathaway, Chubb Corp., Hartford Financial Services Group, Liberty Mutual, Safeco Corp. and Travelers Cos. The group has argued that favorable tax treatment in jurisdictions such as Bermuda and the Cayman Islands have made it increasingly difficult for U.S. firms to compete.

According to Neal, reinsurance cessions to offshore affiliates has grown from $4 billion in 1996 to $34 billion in 2007, with $19 billion of that total going to Bermuda affiliates. In floor comments while introducing the bill, Neal also expressed concern that groups domiciled outside the United States had grown from 5.1% to 10.9% in market share over that same period, with Bermuda-based insurers and reinsurers seeing their market share grow from 0.1% to 4%.

"The tax code currently tries to limit the amount of earnings stripping -- that is, sending U.S. profits offshore through inflated interest deductions -- by disallowing the interest deduction over a certain threshold," Neal said. "In the reinsurance context, U.S. affiliates of foreign-based reinsurance entities may be sending offshore excessive amounts of reinsurance to strip those premiums out of the purview of the U.S. tax system."

The bill, which has been referred to the House Ways and Means Committee, would limit deductions for related party reinsurance cessions to the average percentage of premium ceded to unrelated reinsurers. Excess amounts would be determined by line of business, and the U.S. Treasury would be authorized to enforce provisions of the bill.

The proposal already has divided major trade groups such as the American Insurance Association, the Reinsurance Association of America and the Association of Financial Guaranty Insurers, each of whom include both members of the coalition and members with significant offshore affiliates in domiciles like Bermuda. In February, MBIA Inc. withdrew from the 12-member AFGI, citing differences of the tax issue. Neither AFGI, nor either the AIA or RAA, have taken a public stance on the issue.

Standing in opposition to the proposal are groups such as the Risk and Insurance Management Society, the Florida Consumer Action Network, the National Risk Retention Association, the Organization for International Investment, the Association of Bermuda Insurers and Reinsurers and the CEA, the European insurance and reinsurance federation. The groups formed their own Coalition for Competitive Insurance Rates last fall, when the Senate Finance Committee launched hearings into the subject.

"This bill is an isolationist effort by a handful of very large, very profitable U.S. insurance corporations who intend to create a new barrier for their competitors so that they will benefit from a protected market," said ABIR President Bradley L. Kading. "This proposal could not come at a worse time for the U.S. economy. Higher prices for consumers are the likely outcome."

(By R.J. Lehmann, Washington bureau manager: raymond.lehmann@ambest.com)

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