The Senate Finance Committee has approved for discussion a drafttax reform proposal that includes a provision sought by domesticP&C insurers to change the tax treatment affordedoffshore insurers doing business in the U.S.

Domestic insurers, led by W. R. Berkley Corp., Travelers andChubb, would be the beneficiaries of the proposal, which wasadopted by the Senate panel Nov. 19.

Offshore insurers, like ACE and Swiss Re, oppose the change.They say the proposal is similar to legislation introduced in theHouse and Senate that would reduce the tax benefits foreigninsurers receive by ceding U.S. property and casualty premiums totheir foreign affiliates.

The Coalition for Competitive Insurance Rates, which representsoffshore insurers, said in a statement that the “draft ignoreswarnings from elected officials, state insurance commissioners,trade experts and consumer advocates that this tax would drive upthe cost of insurance to homeowners and small businesses.”

Under the provision, an insurance company would not be allowed adeduction for non-taxed reinsurance premiums paid. In addition, theinsurance company's income would be determined by not taking intoaccount (so no deduction is allowed for) any additional amount paidwith respect to the reinsurance for which the non-taxed reinsurancepremium is paid to the extent he additional amount is not properlyallocable to the premiums.

Finally, according to a Finance panel document, the insurancecompany's income is determined by not taking into account anyreturn premium, ceding commission, reinsurance recovered or otheramount received by the insurance company with respect to thereinsurance for which the non-taxed reinsurance premium is paid tothe extent the item is properly allocable to the premium.

Thus, these items of income (to the extent they arise withrespect to reinsurance for which nontaxed reinsurance premiums werepaid) generally are excluded from the insurance company'sincome.

The provision applies in the case of reinsurance of risks otherthan life insurance, annuity or noncancellable accident and healthinsurance risks.

According to William R. Berkley, CEO of the W.R. Berkley,the provision would limit the ability of foreign insurers tomove income offshore by ceding premiums on insurance productssold in the U.S. to offshore reinsurance affiliates.

Ceding business offshore gives foreign-owned insurers anadvantage because it reduces both underwriting income andinvestment income on reserves that is subject to taxation. Berkleysaid the technical language is not as good as that contained in S.991, introduced in the Senate by Sen. Robert Menendez, D-N.J., andH.R. 2054, introduced in the House by Rep. Richard Neal,D-Mass.

But, in principle, the “language is fine,” Berkley said. “Wedon't get word choices in this,” Berkley said. “The language is OK,not perfect. We are trying to take a step forward, and this takes agood step forward.”

At the same time, he cautioned, “There is a long way to go. Wehave been working for 5 years. This is not a Congress that hasjumped to enact tax legislation.

“The protectionist tax treatment of US insurers' affiliatereinsurance would limit capacity, putting states such as Florida asrisk of being 'underwater' without ready access to internationalreinsurance markets,” said Bill Newton, executive director of theFlorida Consumer Action Network. “By reducing the supply ofreinsurance, homeowners, large and small businesses and publicsector organizations in Florida and across the U.S. will pay theprice.”

The draft language is part of an initiative by the SenateFinance Committee and the House Ways and Means Committee to draftlanguage that would simplify and reform U.S. tax policy.

Berkley said that Rep. David Camp, R-Mich., chairman of the Waysand Means panel, “is supportive of our legislative goal,” but hasnot signed on to the exact language, which was not madeavailable.

As to the CCIR statement, Berkley said that, “Our Congress wouldnot have enacted legislation that would favor foreign carriers overdomestic carriers, as is current tax policy.”

Berkley said the CCIR is merely, “Throwing up smokescreens. Itis silly. They get to move reserves offshore, and that is the oneof the keys to not paying taxes under the 1986 Tax Reform law.”