Offshore Insurers’ Tax Situation May Spur Legislation

Dec 11, 2008

National Underwriter

NU Online News Service, Dec. 11, 10:29 a.m. EST

WASHINGTON —A key senator has requested feedback on proposed legislation that would close a loophole providing a tax advantage to some offshore insurers.

The discussion draft of proposed legislation released last week by Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, sets the stage for a long-anticipated showdown next year in Congress between the offshore insurers and their U.S. rivals.

The tax advantage exists because current tax law allows the U.S.-based affiliates of offshore insurers to cede a large share of their property casualty premiums to the reinsurance units of their parents, which are based in low-tax or no-tax jurisdictions, such as Bermuda.

Under the scheme, the U.S. subsidiary deducts the premium and the foreign parent company does not pay U.S. or local tax on the premium while earning investment income subject to low or no tax.

This occurs because related party reinsurance does not result in a transfer of risk outside the global group. “Thus, it is an efficient way of significantly reducing U.S. tax without transferring risk,” the discussion draft released by Sen. Baucus says. 

A group led Greenwich, Conn.-based W.R. Berkley Co., the Coalition For A Domestic Insurance Industry, issued a statement after Sen. Baucus released its paper saying that growth in related-party reinsurance written to foreign affiliates has been dramatic.

It said that in 2007, $58.4 billion of U.S. premiums went to foreign insurance companies, with nearly 60 percent ($33.8 billion) of those premiums going to affiliated foreign reinsurance companies.

Since 1996, U.S. premiums going to affiliated foreign reinsurers have increased at a compound annual growth rate of 21.4 percent, the group said.

“Today, the U.S. taxpayer, facing unprecedented burdens, also subsidizes the profits of foreign-controlled insurers. U.S.-based insurance groups pay their fair share of U.S. income tax,” the group said in a statement. “The Coalition believes foreign competitors should do the same.”

The issue was a subject before the Senate Finance Committee earlier this year.

The proposed tax change has also been a long-time goal of Rep. Richard Neal, D-Mass., a ranking member of the House Ways and Means Committee, and chairman of its Subcommittee on Select Revenue Measures. He has introduced legislation in every Congress of recent memory that would close the loophole.

The proposal by Sen. Baucus contains “similarities” to H.R. 6969, a bill he introduced in the House in September, the Coalition said.

Anticipating the move by Sen. Baucus, the foreign insurers, members of a group called the Coalition for Competitive Insurance Rates, wrote a letter to the Senate Finance Committee and the House Ways and Means Committee in November expressing its concerns.

“We urge you to be wary of proposed revenue raising amendments that promise the U.S. government more tax revenue but will ultimately have the effect of increasing insurance prices for U.S. policyholders,” the group said.

The letter said that the impact of the Baucus and Neal proposals is that it “essentially imposes an isolationist tariff on international insurers conducting business in the US.”

“Reinsurance is an important tool used by businesses and insurers to control and finance risk,” the letter said.

If Sen. Baucus ultimately decides to introduce legislation and provide support for it within his committee, it would set up a battle between insurance giants.

Supporters of legislation to close the loophole include AMBAC; American Financial Group; Berkshire Hathaway; Chubb; EMC Insurance Companies; The Hartford Financial Services Group, Inc., Hartford, CT; Liberty Mutual and its Safeco affiliate; Markel Insurance Company; MBIA Insurance Corporation; Scottsdale Insurance Company, a subsidiary of Nationwide; Travelers Companies; and Zenith Insurance Company.

Lining up on the other side are such firms as Allianz of America; Zurich; Munich Re; ACE Group; Arch Capital Group Ltd.; and XL America.

Risk retention groups are also supporting the foreign-based insurers. These include the Self Insurance Institute of America; the National Risk Retention Association; Risk and Insurance Management Society (RIMS); the Montana Captive Insurance Association; the Captive Insurance Council of the District of Columbia; the Captive Insurance Companies Association; the American Risk Retention Association; the Association of Bermuda Insurers and Reinsurers; the Organization for International Investment; and the Vermont Captive Insurance Association.