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Bill to Cap Reinsurance Deductibility Gets Mixed Reaction

Source: Business Insurance

Posted on 03 Aug 2009

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Legislation that aims to cap companies' ability to deduct reinsurance on their taxes received a divided response Friday from insurance industry groups.

The bill, H.R. 3424, that Rep. Richard Neal, D-Mass., introduced Thursday is designed to “end the practice of excessive reinsurance between related entities” and alter the U.S. tax code to cap the deductibility of reinsurance premiums paid by U.S. insurers to their foreign affiliates.

Rep. Neal and the bill's supporters argue that the current structure provides a tax loophole that gives foreign insurance groups a competitive advantage over U.S.-based companies.

“The use of affiliate reinsurance allows foreign-based companies to shift their U.S. reserves and their investment income overseas into tax havens, thereby avoiding U.S. tax,” Rep. Neal said in a statement.

Rep. Neal introduced a similar measure last year, on which Congress took no action. In December, the Senate Finance Committee staff released a discussion draft of similar legislation.

The Neal bill received strong support from the Coalition for Domestic Insurance Industry, a group of 14 U.S.-based insurers that includes Greenwich Conn.-based W.R. Berkley Corp., Warren, N.J.-based Chubb Corp. and St. Paul, Minn.-based Travelers Cos. The group last month called for a crackdown on offshore reinsurers.

“This is common-sense legislation,” said William R. Berkley, a spokesman for the coalition and chairman and chief executive officer of W.R. Berkley Corp. “It will allow us to compete on a level playing field and it's crucial to the long-term health of the industry.”

Opponents however, argue that the measure will cut reinsurance capacity and drive up costs for insurers.

The Washington-based Coalition for Competitive Insurance Rates voiced strong opposition to the bill Friday and pointed to a May report that said the proposed legislation would cost consumers more than $10 billion a year and reduce U.S. reinsurance capacity by 20%. The coalition also said these negative effects would be felt most significantly in disaster-prone states such as California, Florida and Louisiana.

The Assn. of Bermuda Insurers and reinsurers also opposes the Neal bill, saying “only a handful” of very large U.S. insurance companies stand to benefit from the bill.

“The measure is very punitive and unnecessary,” ABIR President Bradley Kading said. “It sends the message that if you are writing U.S. business, then all of your capital should be in the U.S. But that runs contrary to the position the United States assumes as a promoter of free trade.”

In addition, the New York-based Risk & Insurance Management Society Inc. on Friday reiterated its opposition to Rep. Neal's legislative efforts.

The bill “would limit the tax deduction to the industry index for each line of property and casualty insurance and, in doing so, would have a chilling effect on these entities and their willingness to serve as a safety valve in many areas of the country," Deborah M. Luthi, a member of RIMS board of directors, said in a statement.

Rep. Neal said the “excess amount will be determined by references to an industry fraction, by line of business, which will measure the average amount of reinsurance sent to unrelated parties by U.S. companies.”

The measure also contains a provision that would allow foreign groups to avoid the deduction disallowance by electing to be treated as a U.S. taxpayer with respect to the income from affiliate reinsurance, Rep. Neal said in the statement.

Observers said action on the bill is unlikely until after the August recess.