Washington

Although President Barack Obama is vowing to clamp down onoffshore tax advantages for U.S. companies, a research firm'sfinding that closing a loophole for offshore insurers could costU.S. consumers over $10 billion per year has sparked a heateddebate involving some of the nation's biggest coverage buyers andsellers.

The study–released May 1 by the Cambridge, Mass.-based BrattleGroup–was endorsed by the Risk and Insurance Management Society,which was part of a group that commissioned it. However, itsconclusions were attacked as flawed by the Coalition for a DomesticInsurance Industry.

The report was released in anticipation that legislation will beintroduced later this month by Rep. Richard Neal, D-Mass., chair ofthe Select Revenue Measures Subcommittee of the House Ways andMeans Committee and a long-term opponent of the loophole. RIMS hasdecried the measure as counterproductive.

Sen. Max Baucus, D-Mont., chair of the Senate Finance Committee,last December issued an exposure draft of legislation that wouldclose the loophole as a way of gauging public support. But most ofthe commentators who responded voiced opposition to changingcurrent law.

The report–titled "TheImpact on the U.S. Insurance Market of a Tax on Offshore AffiliateReinsurance: An Economic Analysis"–found that legislation toincrease taxes on non-U.S. reinsurers would reduce the supply ofreinsurance by 20 percent, cost insurance consumers more than $10billion per year and be particularly onerous for disaster-pronestates.

"Past evidence in insurance markets indicates that whenreinsurance capacity is reduced, consumers will find it difficultto obtain insurance in certain classes of business," the studyconcluded.

Current law allows domestic insurers to cede reinsurance totheir foreign affiliates with no penalty or cap. The report saidending this stipulation would reduce the supply of primaryinsurance by 1.8-to-2.1 percent in the United States and increasethe price of primary coverage by more than 16 percent in some linesof business.

The report was commissioned by the Coalition for CompetitiveInsurance Rates, which includes RIMS, ACE, Allianz Insurance Groupand Zurich Insurance.

"The report is a clarion call to members of Congress and theadministration who might support such legislation under the guiseof protecting American insurers," said Deborah M. Luthi, a memberof the RIMS board of directors and director of enterprise riskmanagement services at Matheson.

"RIMS believes this report provides well-documented evidence ofthe detrimental impact to the global insurance market, domesticproperty and casualty insurance market, insurance consumers, andseveral states that may be prone to one or more natural disasters,"she added.

"This study confirms the fears of the nearly 40 independentexperts, state government officials, business owners andassociations who publicly filed opposition letters to legislationpending in Congress," according to Bradley Kading, president andexecutive director of the Association of Bermuda Insurers andReinsurers.

"This legislation imposes an unnecessary and costly tariff oncompanies that help spread insurance risks for consumers andbusinesses in areas subject to hurricanes, earthquakes, cropfailures and other forms of natural disasters," he added.

However, the U.S. Coalition charged that the study reached"erroneous conclusions."

The coalition–led by W.R. Berkley Corp., Chubb Corp. and theHartford Insurance Group–said conclusions that a tax change wouldbe punitive to foreign insurers and adversely affect the U.S.insurance marketplace "are untrue and do not reflect marketplacerealities."

The group said the proposed Neal bill does not penalize anymarket participant and "merely seeks to level the playing field bytaxing foreign-owned groups writing direct insurance business inthe U.S. similar to the way domestic insurers are taxed."

The coalition said the proposed Neal bill "expressly provides anelection to be taxed identically to a U.S. company with respect tosuch business. There is nothing punitive or unfair about theuniform treatment of all insurers writing business in the U.S."

The Brattle Group report was written by J. David Cummins,professor of risk management, insurance and financial institutionsat Temple University's Fox School of Business and professoremeritus of insurance and risk management at the University ofPennsylvania's Wharton School of Business, along with Michael Craggand Bin Zhou, principals and senior consultants at the BrattleGroup.