Offshore Tax Supporters, Opponents Debate Accuracy Of Study

Jan 24, 2011

The following article was published in PropertyCasualty360 (National Underwriter) on January 21, 2011:


January 21, 2011 By Phil Gusman,

NU Online News Service, Jan. 21, 12:10 p.m. EST

Supporters of the “Neal Bill,” which deals with a proposed tax on offshore reinsurers, said a study commissioned by the bill’s opponents is flawed.

A group of domestic insurers, called the Coalition for a Domestic Insurance Industry, said a study last year conducted by the Brattle Group exaggerates the impact the bill will have on foreign reinsurers and also makes incorrect assumptions. The domestic insurers used a recent economic analysis conducted by consulting firm LECG as the basis for their comments.

“Our analysis found significant shortcomings in the Brattle Group’s assumptions and methodology,” said Christian DesRochers, senior managing director at LECG. “Thus, the Brattle Report fails to make a compelling case that passage of the Neal Bill would adversely affect insurance capacity or pricing for consumers.”

The arguments center around legislation proposed by Rep. Richard Neal, D-Mass., who has advocated for several years that the rules should be tightened on the ceding of premiums. He proposed legislation last year that would deny deductions for reinsurance premiums in excess of the industry average ceded to unaffiliated third parties for each insurance line of business.

A group mainly comprised of offshore insurers and reinsurers, the Coalition for Competitive Insurance Rates, commissioned a study from the Brattle Group last year that estimated the Neal Bill would cost consumers an additional $11-to-$13 billion per year to maintain their current insurance coverage. The study also claimed that enactment of the Neal Bill would significantly weaken competition and reduce reinsurance capacity in the U.S. by 20 percent, while reducing supply and increasing prices disproportionately on those states most vulnerable to catastrophic losses, such as California, Florida, New York and Texas.

However, the LECG analysis questioned the Brattle Group study’s conclusions, stating that offshore reinsurers’ use of affiliates does not remove risk from a given reinsurance group but rather “merely moves risk from one pocket to another” and does not create additional underwriting capacity.

The study further stated, “Contrary to the conclusions of the Brattle study, it is unlikely that foreign-based groups will stop using affiliated reinsurance if the Neal Bill is enacted. Such companies are not precluded from using affiliated reinsurance by passage of the Neal Bill but merely must pay U.S. tax on income related to the reinsured business. Foreign-based groups can keep such reinsurance onshore, or simply make the election under the Neal Bill to treat such income as effectively connected to a U.S. trade or business.”

The study added, “Even if the Brattle study assumptions regarding diminished use of offshore affiliated reinsurance were correct, the Brattle study overstates the potential effect of this reduction on overall insurance capacity.” Any effects, it noted, could be absorbed by the excess underwriting capacity in both the primary and reinsurance markets.

William R. Berkley, chairman and CEO of the W.R. Berkley Corporation and spokesman for domestic coalition, said, “The LECG analysis confirms what we already knew. The Brattle report’s findings are highly suspect and should not be relied upon by policymakers. Leveling the playing field by requiring foreign insurers to pay tax like their U.S. competitors should not impact pricing or capacity in the U.S.”

The Coalition for Competitive Insurance Rates, though, responded, “Policymakers should completely discount the allegations in [the recent] press release from the Berkley Coalition on the LECG study. The Coalition for Competitive Insurance Rates—with its wide membership and scores of supporters across the country—has confidence in the Brattle Group study and its underpinnings. 

“The LECG report is clearly in error ignoring the impact affiliated reinsurance has on diversification of risk, risk management and creation of additional capacity for large loss lines”

The two competing sides made their respective cases on this issue throughout last year in testimony before Congress, at industry conferences and even in competing YouTube videos.