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Pro-U.S. or Protectionist?

It's no great surprise that Bermuda's tax tempest has led to the introduction of a tax bill in the U.S. Congress. It would levy additional taxes on U.S. insurers' risks that may be reinsured by affiliated companies based in domiciles--Bermuda, mainly--that have tax rates of 7 percent or less.

Who knows if it will pass. But the bill--H.R. 4192--is sponsored by prominent people in Congress: Nancy Johnson (R-Conn.), Richard Neal (D-Mass.), and Robert Matsui (D-Calif.) and is heartily backed by such U.S.-based insurers as Chubb, Hartford, Liberty Mutual, and Kemper. They had petitioned Congress to close the alleged tax loophole by which companies based in Bermuda--namely Ace Ltd. and XL Capital Ltd., which picked up big P&C holdings in the United States last year--enjoy tax-free growth on the reserves of U.S. business they reinsure via their Bermuda affiliates.

This results, say bill proponents, in a 10 percent cost advantage over U.S. rivals--an edge that would be eliminated by H.R. 4192 by taxing those reserves at the same rate as if they were based in the United States. The tax wouldn't be imposed on companies that choose to pay U.S. taxes or on firms that cede risks to their affiliates in countries that impose more than 20 percent of the maximum U.S. corporate tax rate of 35 percent. The bill would also end the 1 percent excise tax now imposed on premiums ceded to foreign affiliates in Bermuda. Thus, the legislation targets only tax havens such as Bermuda and avoids entangling the U.S. tax treaties with Germany, Switzerland, and elsewhere.

Invoking the sort of dire rhetoric typical of Congress, Rep. Johnson called for action "in a swift bipartisan manner to shut down this blatant abuse of the tax code. If not, the result will be a significant erosion of the U.S. tax base, a continued unfair competitive advantage for foreign reinsurers over U.S. reinsurers in our own market, and a policy that encourages U.S. insurers to move offshore."

True, such companies as Everest Re, PXRE Corp., White Mountains Insurance Group, and Trenwick Group are relocating to Bermuda and will avail themselves of its tax advantages. But the threat of a wholesale migration of big insurers to the island is unrealistic. And as for "a blatant abuse of the tax code," that seems extreme--intercompany reinsurance takes place at market rates and ceding commissions paid to U.S. affiliates are taxed in the United States, while the 1 percent excise tax is imposed on all the premiums ceded, not merely on the profits.

But now that Bermuda insurers like Ace and XL are competing directly in the U.S. market, H.R. 4192 has the ring of protectionism. In a statement, Ace condemned it as "pork barrel politics at its worst. It would favor a few Northeastern U.S. insurance companies, but jeopardize the ability of the industry to meet the capacity needs of the domestic market, particularly with respect to coverage for hurricanes, floods, and other natural disasters."

Well, considering that the bill is relevant only to reinsurance for related parties, it doesn't seem that it would limit the totality of reinsurance capacity for U.S. insurers in general. But the complexities of the bill are troubling. It's been noted, for example, that a Swiss owned company with U.S. holdings that reinsure to a Bermuda affiliate--as, for example, Zurich U.S. does--would be impacted by a tax increase that might violate the existing U.S.-Swiss tax treaty.

But the deeper problem with H.R. 4192 is that it appears to be turning to the tax code as a means of resolving a competitive issue. The bill's proponents don't deny that they view it as a means of leveling the playing field. But using the tax code as a sort of big stick to ward off the encroachments of Bermuda insurers seems wrong. Sure, the Bermuda biggies have prospered and broadened their franchises as a result of offering excess liability cover in the mid-1980s, when U.S. insurers were refusing to do so.

Indeed, Ace and XL helped innumerable U.S. businesses at a difficult time, and they have always functioned within the law. It would seem fairer and wiser to rely on the marketplace--and not the tax hammer--to beat them at their own game.

PARTNER'S MOVE: At least one Bermuda insurer is backing off the U.S. market a bit these days, now that PartnerRe has agreed to sell its wholly owned U.S. life subsidiary to France's SCOR Group. The sale includes PartnerRe Life and its subsidiaries Republic Vanguard Life Insurance Co., Investors Insurance Corp., and Investors Marketing Group Inc.

"Based upon our evaluation of the strategic alternatives regarding the U.S. life reinsurance operations acquired as part of the purchase of Winterthur Re, we concluded that PartnerRe would concentrate its U.S. activities on advancing its non-life initiatives," says PartnerRe CEO Herbert Haag, who noted that his firm would continue to deal in life reinsurance in Paris, Zurich, Canada, and the Far East. "PartnerRe Group's strategy to develop its life reinsurance operations outside the U.S. is not affected by our decision to sell PartnerRe Life."
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Publication:Risk & Insurance
Date:Jun 1, 2000
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