Filed Under:Carrier Innovations, Regulation/Legislation

Berkley Disputes Offshore Tax Report Findings Ahead Of Hearing

NU Online News Service, July 13, 3:50 p.m. EDT

Authors of a recent study that opposed a proposed tax on offshore reinsurers "don't have their math right," according to William R. Berkley, chairman and CEO of the W.R. Berkley Co.

In comments to the NU Online News Service, Mr. Berkley said it is difficult to understand how raising taxes by an estimated $1.9 billion by closing a loophole--as projected by the Joint Tax Committee--would cost consumers an additional $11 to $13 billion per year to maintain their current insurance coverage.

The study, released July 12 by the Brattle Group, found that tightening rules dealing with the tax deduction taken by insurers who cede premiums to overseas affiliates, including reinsurers, would create annual increases of $11 to $13 billion.

The $1.9 billion in taxes is projected to be the revenues raised annually by enacting H.R. 3424, legislation introduced by Rep. Richard Neal, D-Mass.

The bill, and the issues raised by the proposed change in tax rules, will be the subject of a Wednesday hearing before the Select Revenue Measures Subcommittee of the House Ways and Means Committee.

The Brattle Group study claims 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 increase prices disproportionately on those states most vulnerable to catastrophic losses, such as California, Florida, New York and Texas."

But Mr. Berkley, who will testify Wednesday, argued that the projected costs as calculated by the Brattle Group analysts were generated by adding up a "series of disconnected facts," and, in fact, "are nonsensical."

Mr. Berkley also disagreed with the study's conclusion that the "proposed tax would all but eliminate offshore affiliate reinsurance."

The study says the proposed Neal bill would define a benchmark above which offshore affiliate reinsurance is "excess" and is thus subject to the tax.

The study contends the benchmark as proposed by the Neal bill "is both illogical and perverse, penalizing U.S. subsidiaries for their use of non-affiliate (as well as affiliate) reinsurance."

The Brattle Group analysts project that 87 percent of offshore affiliate reinsurance, $26.0 billion of $29.8 billion, would be classified as "excess."

Mr. Berkley said the study's conclusions "show a lack of understanding as to how reinsurance works in the U.S."

He said the Neal bill has a "very narrow focus" that would create a level playing field for both domestic and offshore insurers and reinsurers.

He said offshore insurers can eliminate the impact of the tax by "electing to have their U.S. domestic affiliate taxed as a U.S. company."

Mr. Berkley said he doesn't blame offshore insurers for ceding premiums from their U.S. units to offshore affiliates.

The key difference is that the U.S. taxes investment income; no other country does that in the same manner, Mr. Berkley said.

"They should seek to maximize their profits," Mr. Berkley said. But, as "American companies, we don't [believe] that should be done in a way that penalizes domestic insurers"

Both Rep. Neal and the Obama administration have offered proposals to tighten the rules.

The Obama administration proposal would allow a foreign insurer to move half its premiums offshore without taxation.

The Neal bill would raise more revenue because it would base taxes on a benchmark by line of business, Mr. Berkley said.

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