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Face off: two industry leaders debate H.R. 6969, a bill to limit how foreign insurers account for premiums ceded offshore.

A Congressional committee is considering a bill that would cap the deductible amount of reinsurance premiums that foreign insurers and reinsurers cede from U.S. units to offshore affiliates.

The legislation, H.R. 6969, would address concerns raised in the past year by the 14-member Coalition for a Domestic Insurance Industry, which includes major U.S.-based property/casualty insurers such as W.R. Berkley Corp., Berkshire Hathaway, Chubb Corp., Hartford Financial Services Group, Liberty Mutual, Safeco Corp. and Travelers Cos. The group contends that favorable tax treatment in jurisdictions such as Bermuda and the Cayman Islands have made it increasingly difficult for U.S.-domiciled firms to compete.

The bill, introduced by U.S. Rep. Richard Neal, D-Mass., has been referred to the House Ways and Means Committee. It would limit deductions for related-party reinsurance cessions to the average percentage of premium ceded to unrelated reinsurers. Excess amounts would be determined by line of business, and the U.S. Treasury would be authorized to enforce its provisions.

The proposal has divided major trade groups such as the American Insurance Association, the Reinsurance Association of America and the Association of Financial Guaranty Insurers. Each organization includes members of the coalition as well as members with significant offshore affiliates in domiciles such as Bermuda. In February, MBIA Inc. withdrew from the 12-member AFGI, citing differences over the tax issue; AFGI, AIA and RAA haven't taken a public stance.

Opposing the Neal bill are the Risk and Insurance Management Society; Florida Consumer Action Network; National Risk Retention Association; Organization for International Investment; Association of Bermuda Insurers and Reinsurers; and CEA, the European insurance and reinsurance federation. The groups formed the Coalition for Competitive Insurance Rates a year ago, when the Senate Finance Committee held hearings on the issue.

The following articles express the two sides' differences over H.R. 6969.

Level the Playing Field

by William R. Berkley


Offshore companies enjoy an enormous competitive advantage over

taxpaying insurance companies headquartered in the United States. With the stroke of a pen, companies can enter into transactions with affiliates in tax-advantaged locations and legally avoid paying billions of dollars in taxes. In many cases, these companies' tax rates are well under 10%. In at least one instance, it's 1%.

Obviously, the domestic insurance industry cannot compete with foreign-owned rivals on such an uneven playing field. U.S. Rep. Richard Neal, D-Mass, has introduced H.R. 6969 to alleviate this disparity and prevent America's primary insurance industry from being driven offshore, taking with it the billions of dollars in annual tax revenues that it now generates for the U.S. Treasury

It is imperative for the U.S. economy, which generates almost half the world's property/casualty premiums, to have a vibrant domestic insurance industry. Remember, the insurance industry provides a critical part of the economic confidence society needs to survive these uncertain times.

In fact, with one of the largest U.S. insurance companies having to sell off a considerable portion of its insurance assets to avoid bankruptcy, it is now essential that we act immediately to shore up the U.S. market. That said, there's a significant likelihood that a substantial amount of this business--potentially tens of billions of dollars a year--will migrate offshore to tax-advantaged locations. After all, capital is attracted to the most favorable tax domicile.

Case in point: In the wake of 2005's hurricanes, more than $30 billion of capital was raised to establish new offshore vehicles to provide capacity to the U.S. market. American investors funded the majority of these offshore companies based in tax-advantaged locations, yet the majority of both their business and employees came from either the United States or the United Kingdom.

Offshore reinsurers, attempting to obscure the real issue, argue that legislation will diminish the benefits that the offshore reinsurance community provides to the United States. That, on its face, is ridiculous. The proposed Neal bill would only apply to certain excessive, non-taxed reinsurance premiums paid by subsidiary companies to affiliates with respect to U.S. primary risks. It does not affect reinsurers providing third-party reinsurance to unaffiliated insurers.

Consequently, it will neither affect the market for catastrophe coverage that protects Americans from natural disasters, nor the market for crop insurance. In those cases, companies buy reinsurance from unaffiliated reinsurers. It will not cause prices to rise, or prevent coastal residents from obtaining insurance to protect themselves from hurricanes.

The primary insurers for homeowners in the United States are U.S.-based. If anything, corrective legislation will free up more capital to provide such reinsurance. The legislation does not afford any special treatment or consideration to U.S. companies, but only reduces an unfair competitive tax advantage that favors foreign-controlled insurers at the expense of domestic insurers. In fact, any foreign-owned insurer may eliminate the entire issue by electing to be taxed on their U.S. business as a U.S. taxpayer--creating a truly level playing field.

And Washington, D.C. can rest assured: This is not about erecting trade barriers; it is simply a matter of establishing tax fairness. No foreign-owned company operating in the United States should he allowed to avoid most of its taxes simply because its offshore parent can shift money from one pocket to another.

The cost to the United States is not just the loss of billions of dollars a year in income taxes from these offshore companies. The greatest cost we face is that domestic insurance companies may be forced by this unfair tax structure to flee to untaxed domiciles. Should that happen, $22 billion in annual tax revenues would disappear from the U.S. Treasury.

Anyone who doesn't think that could happen should take a look at Great Britain. There, the vast majority of independent underwriters at Lloyd's have moved their headquarters from London to Bermuda. And they should consider the reinsurance segment of the U.S. property/casualty business that already has moved offshore. The Reinsurance Association of America only has two truly American-domiciled companies out of a total membership of 36 firms.

Clearly, Congress needs to act before the entire insurance industry is compelled by economic necessity to leave the country. The U.S. tax code must he changed so that it no longer favors foreign insurers at the expense of their domestic, taxpaying competitors. Over the long run, economics ride.

William R. Berkley is chairman and chief executive officer of W. R. Berkley Corp. He wrote this article on behalf of the Coalition for a Domestic Insurance Industry, whose members include 14 insurers and reinsurers.

Marketplace Would Be Disrupted by Janice Ochenkowski


By amending the federal tax code, H.R. 6969 would alter the landscape of the property/casualty insurance and reinsurance markets in the United States.

Not for the better, but for the worse. The change would occur at the expense of consumers by favoring large domestic insurers, and would be accomplished by artificially capping the deductibility of reinsurance premiums permitted by domestic companies affiliated with foreign reinsurers.

For years, domestic insurers have been able to deduct premiums for reinsurance ceded to their foreign affiliates without limit. Under H.R. 6969, introduced by Rep. Richard Neal, D-Mass., tax deductibility of reinsurance premiums would be limited to the industry index for each line of insurance.

Reinsurance is an important resource used by corporations and insurance companies to manage and finance risk. Under the current system, companies ceding reinsurance free up more capital to potentially provide even more insurance to domestic consumers.

As the voice for risk managers and commercial insurance buyers, the Risk and Insurance Management Society Inc. opposes any legislation that would negatively impact the global reinsurance marketplace and the U.S. businesses that rely on it. Should affiliate foreign reinsurers curtail their business, the marketplace could be radically disrupted, resulting in less available, less affordable insurance and limiting the capital available to U.S. insurance companies.

Foreign reinsurers with domestic subsidiaries fill a need in both the U.S. and global insurance markets, and are critical to the economy's continued health and vitality. Over the past few decades, these entities have stepped in to fill a void when domestic insurers did not respond to U.S. insurance buyers' needs.

Following the many natural disasters, catastrophes and the Sept. 11 terrorist attacks, domestic insurers were unable to provide necessary coverage at competitive prices to serve the needs of commercial and residential insurance buyers. These reinsurers provided an important market option. If enacted into law, H.R. 6969 would inevitably have a chilling effect on these foreign entities and reduce their willingness to serve as a "safety valve" for coverages in urban areas and regions prone to natural disasters.

Despite persistent efforts by Congressman Neal, earlier versions of H.R. 6969 never moved beyond the tax-writing committees of the House. Congress has resoundingly rejected such efforts in the past because of their potential impact on insurance availability and affordability and the consequences for commercial purchasers. For these same reasons, Congress should reject this legislation once again.

Janice Ochenkowski is managing director, Jones Lang LaSalle Inc. She wrote this article on behalf of the Risk and Insurance Management Society Inc. as its president.
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Title Annotation:Reinsurance/Capital Markets: Offshore Ceding
Publication:Best's Review
Date:Dec 1, 2008
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