Seeking to ensure that all carriers pay their fair share of taxes, a U.S. Senate panel last week examined relationships between insurers and foreign reinsurers–particularly if they are affiliates of the same company. The hearing featured a face-off by two major carriers.

Senate Finance Committee members were not evaluating specific proposals, and did not debate specific legislative proposals–although Sen. Byron Dorgan, D-N.D., who appeared as a witness, asked the committee to consider legislation he authored (S. 396) to help curb offshore abuses. Effectively, he said, his bill would examine companies moving offshore to ensure they are actually making a substantive transaction.

“We tax you as if you never moved to that tax haven,” he said.

Sen. Dorgan also highlighted some alleged 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 due to the effect that 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.”

One member of the panel, however, said favorable tax treatment enjoyed by foreign reinsurers may have a positive side, in that it allows for lower rates for consumers.

Sen. Trent Lott, R-Miss., noted that he himself was a “victim” of Hurricane Katrina, adding he was “devastated by the insensitivity, unfairness and greed of the property and casualty industry.”

While U.S. reinsurers may say they are seeking a level playing field to compete, he noted that profitability is more and more becoming the primary goal of companies, and questioned whether a leveling of the playing field could have an effect on homeowners in high-risk areas that are already struggling to find coverage.

“We want fairness,” he said, but added his concern whether homeowners would still be able to afford coverage should foreign reinsurers lose some of their tax benefits.

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.”

William Berkley, president and chief executive officer of W.R. Berkley Corp., said the problem has existed for decades and predicted 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.”

However, Donald Kramer, chairman and CEO of Hamilton, Bermuda-based Ariel Reinsurance Ltd., argued that many times the decision to cede risk to an offshore reinsurer among affiliates is made for reasons other than taxation, and that Bermuda-based reinsurance transactions are already subject to taxation.

All premiums–whether ceded to a Bermuda-based reinsurer, or paid by a U.S.-based company buying coverage directly from a Bermuda-based insurer–are subject to an excise tax, he said, noting this is a gross premium-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.

Additionally, he said that over the past year, 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, adding that a longer time frame would show an increasing trend of premium being ceded offshore.

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 nonaffiliated firms. “That alone shows there's something going on.”

Mr. Kramer acknowledged 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 added that taxation issues have been “overblown” as the motive for ceding risks offshore.

With mugs–in Don's folder:

Special Reports /

Insurers Clash Over Tax Advantages For Offshore Reinsurance Transactions

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