The Obama administration has again revived its proposal toreduce the tax benefits foreign insurers receive by ceding U.S.property and casualty premiums to their foreign affiliates.

The provision, contained in President Obama's budget for 2014unveiled Wednesday, prompted a flurry of responses from domesticinsurers who support the legislation—led by William R. Berkley, CEOW.R. Berkley Corp.—and challengers of the proposal.

Opponents include foreign insurers led by the BermudaAssociation of Insurers and Reinsurers as well as a libertarianthink tank and representatives of the Gulf Coast and Atlantic Coastwho fear the proposal would raise the cost of catastrophic coveragein their states.

The provision would completely deny a business expense deductionby U.S. insurers of premiums ceded to their foreign affiliates.

The U.S. affiliates would receive offsets against thistaxable income for ceding commissions, returned premiums andrecoverables under the proposal. It would apply to the USsubsidiaries of all non-U.S. insurers as in past.

The provision is consistent with, but not identical to,legislation dealing with the issue introduced during the lastCongress in the Senate by Sen. Robert Menendez, (D-N.J.) and in theHouse by Rep. Richard Neal (D-Mass).

The legislation pits domestic insurers, led by W.R. Berkley andChubb, against foreign writers, led by, but not limited to, Bermudainsurers and reinsurers. Among its critics is CEA, a Europeaninsurance and reinsurance federation.

Opponents have enlisted Swiss Re and other large Europeaninsurers and reinsurers in their fight against the tax.

R.J. Lehmann, a senior fellow at the R Street Group, alibertarian think tank, said in a statement that it “represents aprotectionist and economically destructive tax that would benefit asmall group of domestic insurance companies at the expense of U.S.consumers.”

Lehmann said that the costs of the proposal “far exceed therevenue it would generate, and its ultimate effect would be todrive reinsurance capital—so sorely needed in catastrophe-pronestates like Florida, Louisiana, Texas and California—out of thecountry.”

He said in addition to making reinsurance more costly andlimiting access to the global reinsurance industry, which allowscatastrophe insurance to function by pooling a wide variety ofdifferent kinds of risks from around the world, the proposal isunnecessary.

Cross-border reinsurance transactions are already subject to atariff and the Internal Revenue Service has the authority todisallow any reinsurance transactions that don't involve a genuinetransfer of risk, he said.

“Targeting global insurance companies for discriminatory,punitive taxes would be disastrous for areas vulnerable to naturaldisasters,” said Bill Newton, executive director of the FloridaConsumer Action Network, a member of the Coalition for CompetitiveInsurance Rates—a group created by Bermuda and other foreigninsurers, and includes representatives of Gulf Coast states and theRisk and Insurance Management Society.

“Instituting this tax would significantly reduce thesupply of reinsurance in the US, decrease America's ability tomanage volatile, catastrophic insurance risk, and would furtherburden American homeowners, large and small businesses and publicsector organizations during these challenging economic times,”Newton said.

But Berkley countered by saying that opponents of the proposalare “using scare tactics” to block the legislation.

He said it only affects reinsurance ceded to foreignaffiliates. “It expressly does not affect third-partyreinsurance—those arrangements that add overall capacity to themarket by shifting risk to unrelated parties,” Berkley said.

According to the LECG group, a consulting group retained bysupporters of the provision, “this fact alone causes opponents'claims regarding potential adverse effects on capacity and pricingto be untrue.”

Berkley contended that “it is highly unlikely that foreigngroups will stop providing coverage in the U.S. market if they arerequired to pay tax like U.S. companies and compete on a levelplaying field.”

Even if they did, the rest of the market would quickly replaceany capacity, Berkley insisted.

“Moreover, given the proposal impacts only foreign-owned groups,it would be difficult for them to effectuate a price increaseunilaterally, given their market share,” Berkley said.

Further, Berkley said, “Even if opponents' claims were true(which they're not), any purported effect on pricing or capacitywould arise from an unintended tax subsidy for foreign-basedcompanies at the expense of their U.S. competitors and other U.S.taxpayers.

“Would Congress ever intentionally pass a tax incentive onlyapplicable to foreign-based companies in order to reduce insuranceprices or provide additional capacity?” he asked. “The answer isclearly no. At a time of burgeoning deficits and possible taxincreases on U.S. workers and businesses, it's unfathomable that wewould continue this unintended loophole allowing foreign-basedinsurers to avoid U.S. tax on their U.S.-based business,” Berkleysaid.