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Reinsurance Coalition Slams White House Proposal to End Tax Breaks for Foreign Affiliates

Source: A.M. Best - Jeff Jeffrey

Posted on 12 Apr 2013 by Neilson

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Reinsurance taxRepresentatives of the reinsurance industry have come out against a White House proposal to end tax breaks on premiums paid to affiliates domiciled outside the United States, saying the "protectionist" tax policy would limit capacity and drive up the cost of insurance.

President Barack Obama's April 10 budget proposal says ending the tax breaks would cut $6.2 billion from the federal deficit by 2023. In a Treasury Department document explaining the proposal, the administration argues that current policy creates "an inappropriate incentive for foreign-owned domestic insurance companies to reinsure U.S. risks with foreign affiliates."

If approved by Congress, the change would affect policies issued in taxable years beginning after Dec. 31.

However, the Coalition for Competitive Insurance Rates said in a statement that Obama's proposal "appears to ignore the facts" about benefits provided by giving foreign reinsurance affiliates a tax incentive to write policies in areas of the country that are prone to natural disasters. The coalition is made up of business organizations, consumer advocacy groups, insurers and their associations.

International insurance companies are expected to pay nearly 50% of the losses incurred from Hurricane Sandy. CCIR said the international share is currently estimated at $9 billion and could potentially reach $12 billion.

CCIR also cited the role foreign reinsurance affiliates have played during the record-setting droughts that destroyed crops across the country. Corn farmers, for example, produced less than three-fourths of the corn the U.S. Department of Agriculture anticipated when planting was done in the spring. CCIR said current estimates project that foreign reinsurance affiliates will pay $1.2 billion to cover privately insured crop losses, approximately 85% of total anticipated payouts.

"The ability to pool U.S. hurricane and earthquake risks with the risks for typhoons in Japan or earthquakes in Latin America means U.S. coverage costs less than it would without reinsurance, making it therefore essential for U.S. consumers and businesses. Throwing up a protectionist wall to block globally-provided reinsurance is a risk that U.S. businesses cannot afford, and would invite trade retaliation against the U.S. from our largest trading partners," Carolyn Snow, Risk and Insurance Management Society's board liaison to the society's external affairs committee, said in a statement.

Louisiana Insurance Commissioner James Donelon, who serves as president of the National Association of Insurance Commissioners, also released a statement opposing the White House proposal.

"As we reflect on the disastrous events of the past year, it is clear that the U.S. needs a robust insurance market that is open to as many competitors as possible and encourages foreign direct investment, Donelon said.

Last year, economic consulting firm The Brattle Group released a study of legislation introduced by Rep. Richard Neal, D-Mass., and Sen. Robert Menendez, D-N.J., that would have ended the tax break for premiums paid to foreign reinsurance affiliates. The report found that ending the policy would reduce the net supply of reinsurance in the United States by 20%, raising premiums by $11 billion to $13 billion.

A separate coalition composed of 13 U.S.-based insurance groups threw its support behind the Neal-Menendez legislation, arguing the tax break could ultimately destroy the domestic reinsurance industry. The Coalition for A Domestic Insurance Industry's members include W. R. Berkley Corp., Berkshire Hathaway Inc. and Chubb Corp.

The White House budget proposal also recommends reducing subsidies given to farmers to purchase crop insurance, a move crop insurers have opposed in the past.

The budget includes $11.7 billion in cuts to federal crop insurance subsidies over the next decade. The White House estimates the federal government will save $37.8 billion over the next 10 years by combining those cuts with limits on direct farm payments and reduced spending on conservation programs.

The proposal argues that crop and livestock productions have reached all-time highs, making it difficult to justify income support payments to farmers.

Under the White House proposal, crop insurance subsidies would drop by $513 million in 2014, with cuts increasing annually from then on.