WASHINGTON– If Congress fails to address insurers' use of Bermuda as a tax haven, increasing amounts of capital will flee the United States, an insurance executive warned a Senate panel today.

The comments by William Berkley, president and chief executive officer of W.R. Berkley Corporation were made at an exploratory meeting of the Senate Finance Committee, which is seeking to ensure companies are paying their taxes and eyeing relationships between insurers and foreign reinsurers, particularly if they are affiliates of the same company.

In addition to hearing from a Bermuda reinsurance executive, expert on hedge funds and college endowments, the committee also heard from a senator pushing legislation to tax U.S. firms that manage what amounts to a paper transfer offshore.

Mr. Berkley said that the problem of corporate offshore relocation has existed for decades, and that more and more U.S. capital will move overseas if it is not addressed.

“This unfair tax advantage, which began to be exploited around 20 years ago, has already caused a significant migration of insurance capital abroad,” he said. “If left unchecked, this could cause much more of the U.S. insurance capital base to migrate abroad and ultimately could threaten the future of our domestic insurance industry,” he predicted

However, Donald Kramer, chairman and chief executive officer of Hamilton, Bermuda-based Ariel Reinsurance Ltd., argued that many times the decision to cede risk to an off shore reinsurer among affiliates is often made for reasons other than taxation.

Mr. Kramer said Bermuda based reinsurance transactions are already subject to taxation in the United States. All premiums, whether ceded to a Bermuda-based reinsurer or paid by a U.S.-based company purchasing coverage directly from a Bermuda-based insurer, are subject to an excise tax, he said.

That tax, he noted, is a gross-based tax and must be paid regardless of the eventual outcome of the coverage. “Insurance companies are not always profitable,” he said, “but the gross tax is always there.”

Additionally, Mr. Kramer noted that Bermuda is not the sole repository for reinsurance, as one would expect it to be if the advantages were so great.

Mr. Kramer claimed the amount of reinsurance being ceded to Bermuda based companies has actually declined, but Mr. Berkley countered that the decline was due largely to a single large transaction that took place last year that skewed the figure, and that a longer time frame would show an increasing trend of premium being ceded to offshore companies.

Mr. Berkley also pointed to the fact that reinsurance between affiliates is often two to three times more than the amount of risk ceded between non-affiliated firms. “That alone shows there's something going on,” he said.

Mr. Kramer acknowledged that the taxation issues do play a role in company decisions to cede premium to offshore affiliates, but argued that other issues, such as capital management and the level of regulation in dealing with multiple state jurisdictions, plays just as great a role if not greater.

“Certainly taxation is an issue, there's no doubt about that” he said, but he added that taxation issues have been “overblown” as the motive for ceding risks offshore.

The committee was also not considering any specific legislative proposals, but, Sen. Byron Dorgan, D-N.D., who appeared as a witness, asked the committee to consider legislation he authored, [S. 396], to help curb off-shore abuses. Effectively, he said, the bill would examine companies moving off-shore to ensure that they are actually making a substantive relocation

Under his bill, he said, where the transfer is not real, “We tax you as if you never moved to that tax haven.” Sen. Dorgan also highlighted some of the abuse in the industry, noting media reports that a four story building in Bermuda is the official headquarters for over 12,000 companies taking advantage of the island's favorable tax laws.

The issue is important, according to Sen. Max Baucus, D-Mont., not only because of the tax avoidance, but because of the effect tax avoidance can have on the overall market.

“As a result,” of shifting risk to a parent company in an offshore tax haven such as Bermuda, he said, “the subsidiary property and casualty insurance companies can charge lower premiums for their insurance. They get a competitive advantage over insurance companies doing business in jurisdictions that tax investments.”

The committee's ranking member, Sen. Chuck Grassley, R-Iowa, noted that representatives of U.S. reinsurers are not seeking to bridge the competitive gap by reducing their own tax treatment, but rather by “leveling the playing field.”

However, he added, before Congress acts, it should know what the problem truly is. “Let's not put the cart before the horse,” he said. “Before we try to figure out how to solve a problem, we need to determine whether or not a problem exists and, if so, we need to define it.”

Sen. Trent Lott, R-Miss., said he wanted fairness,” but he has a concern that U.S. carriers offering homeowners insurance would not make it affordable if their foreign reinsurers lose some of their tax benefits.

Homeowners in high-risk areas are already struggling to find coverage; he noted and took the occasion to castigate property-casualty insurers for “insensitivity, unfairness and greed.” Mr. Lott sued his insurer in a claim dispute after his home was destroyed by Hurricane Katrina.

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Senate Unit Eyes Insurers Offshore Tax Status

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