NU Online News Service, Oct. 14, 2:57 p.m.EDT

Legislation introduced that would place significant restrictionson domestic insurers that cede reinsurance to their foreignaffiliates is being strongly opposed by the Risk and InsuranceManagement Society, (RIMS), which it says could ultimately impactcapacity.

According to RIMS, the proposed legislation, introduced by Rep.Richard Neal, D-MA, and Senator Robert Menendez. D-NJ, woulddisrupt the global insurance marketplace, making commercialinsurance less available and affordable to U.S. consumers.

The scope of the bill would impact a majority of the industry,but particularly consumers in areas of the country subject tonatural disasters as well as terrorism risks.

"From a capacity standpoint, if we take away one of the toolsfor reinsurers, it's going to reduce their ability to share riskand therefore have a deleterious effect on capacity," John Phelps,board liaison to RIMS External Affairs Committee and director,business risk solutions, Blue Cross and Blue Shield of FloridaInc., tells NU Online News Service.

At the same time, he says, if reinsurers are restricted in howthey can manage their portfolio risk, "then it will increase thecost of insurance domestically, because their opportunity to use aforeign reinsurer to lay off some of that risk is taken away.Therefore, it will be more expensive for the limited capacitythat's left. Cost and capacity are always inextricably linked."

The bottom line for buyers, Phelps says, "is that, especially inthis economy, we need all the tools in the toolbox that we can get.If you start taking some of that away, it will have an impact oncapacity and a knock-on impact to the premiums we have to pay andshare with our customers."

He explains that the proposed legislation would heavily impactrisk managers with large property, "especially in catastropheareas, like where I am, in Florida. It's difficult if you havesignificant property, like a school board or [an owner of] retailstores or a chain outlet, to have the capacity in those areas,because insurers don't want to risk their capital in areas wherethere could be hurricanes."

He adds, "You have to be able to share that risk to make itviable for carriers to offer the coverage—and at a rate that we canafford."

Phelps also points out that more businesses are impacted nowbecause capacity areas have widened. Tornadoes, earthquakes andother catastrophes are happening in places where they didn't occurin the past—such as a recent earthquake that shook Washington, D.C.and New York.

"It's redefining what's considered to be catastrophic, andcarriers are looking at this and being more conservative in wherethey apply their capital," he says.

Phelps says that by disallowing the tax deduction forreinsurance premiums ceded by U.S. insurers to offshore affiliates,"the legislation will inevitably dismantle a legitimate practice inrisk management which facilitates the shifting and pooling of avariety of risks from a domestic insurer to an affiliatereinsurer."

Phelps adds, "During this period of consumer uncertainty andeconomic fragility, now is not the time for tinkering with thisprovision of the tax code, especially when economists forecast thata change could cost individual and commercial consumers over $10billion a year."