U.S. Closes In on Terror Pool.

The Insurance industry is encouraged by the White House plan for a federally backed reinsurance pool; economic-stimulus proposal includes insurers.

Insurance industry advocates are cautiously optimistic that Congress and the Bush administration are moving toward a plan that would shield the industry from some of the costs of any future terrorist attack.

David Farmer, a spokesman with the Alliance of American Insurers, said reports of a three-year terrorism insurance plan developed by the Treasury Department and the White House "are encouraging," even though the plan is "somewhat different" from what industry representatives had been pushing.

"We think this is a positive development," Farmer said. "Hopefully, this will mean we'll have a program in place when Congress adjourns in three weeks."

The "preliminary plan," which the Wall Street Journal reported that President Bush had approved Oct. 12, is a three-year program in which insurers would pay 20% of the first $20 billion in claims from terrorist activity during the first year, while the government would pay the rest. Beyond $20 billion, the industry's share of the costs would drop to 10%. After three years, the insurers would pick up a larger, as yet unspecified, percentage of such claims.

The Bush administration would consider a more permanent solution to terrorist-related claims when the three-year plan expires, including the plan backed by the industry--a government insurance pool similar to the United Kingdom's Pool Reinsurance Co. Ltd. that would pay for terrorism-related claims.

The insurance industry had developed some major points for a proposal to take to Congress to establish a $10 billion terrorism reinsurance pool that would be backed by the federal government in case future terrorism losses exceeded that figure.

The industry proposed establishing a privately run and financed reinsurance pool, to be called Homeland Security Mutual Reinsurance Co. Policyholders would pay a surcharge, which Homeland would use to buy its own reinsurance--or retrocessional coverage--from the U.S. government, in return for a premium to be determined by the Treasury Department.

Farmer said that although the Bush administration's new proposal doesn't take that route, the affiance is encouraged. "The alliance, along with other industry representatives, will be looking for clarification from Treasury and the administration; he added.

Farmer said it is important for insurers to have a government plan in place by the time Congress adjourns for the session, since reinsurance renewals will be getting into full swing by January.

Insurers Would Benefit From Proposed Tax Change

Some tax-related benefits for insurers are included in legislation President Bush and Congress are working on to stimulate the economy.

The package, H.R. 3090, includes a provision that would allow insurers and other financial-services firms to defer taxes on overseas income until the money is brought back to the United States, according to a copy of the bill.

It's been a temporary part of the U.S. Tax Code for the past three years, but it would become permanent if the bill were signed into law, said Jack Dolan, a spokesman for the American Council of Life Insurers.

Rep. Jim McCrery, R-La., had co-sponsored a bill in the spring to permanently extend the subpart F exemption for active financing income. Language from that bill is now part of the Economic Security and Recovery Act of 2001.

The temporary extensions, due to expire at the end of the year, were helpful to U.S. life insurers and other financial-services companies competing in international markets, but the provision's temporary status in the tax code also meant uncertainty.

"It gives business the confidence to rely on the tax code," Dolan said. "Business wants stability in the laws regulating them and in the taxes they have to pay. It brings confidence to long-term planning."

Foreign financial-services companies, and even U.S. manufacturing companies, don't have to pay taxes on income earned overseas until it's brought back home, Dolan said.

The result is U.S. insurers and financial-services companies are taxed at a higher rate on overseas income than their global competitors--as much as 20% more--because foreign companies aren't taxed on overseas investments until they bring the money home.

U.S. financial-services companies faced immediate U.S. taxes on their foreign subsidiaries' earnings, whether or not that income ever was received by the U.S. parent. "We were being penalized competitively overseas," Dolan said.

Separate language in the bill also allows insurers and financial-services firms to use the reserve calculation methods of the country in which they're doing business, rather than using the U.S. method. Again, the objective is to put U.S. firms on even footing with global competitors, he said.

Insurers have been making the case for several years for amending the Internal Revenue Code to permanently extend the subpart F exemption for active financing income, Dolan said.