Buyers Will Keep Bermuda Tax Breaks Alive, Says Lobbyist

NEW YORK--U.S. commercial insurers' efforts to have Congress eliminate tax advantages for Bermuda insurers will be blocked by insurance buyers who have thwarted them in the past, a lobbyist suggested here.

Insurance buyers groups have successfully struck down efforts by U.S. commercial insurers to get Congress to remove tax advantages enjoyed by Bermuda competitors, and they'll probably do so again, a lobbyist suggested here.

Bradley Kading, president and executive director of the Association of Bermuda Insurers & Reinsurers, aired that view this week in response to a question posed to him during a joint luncheon of the Association of Professional Insurance Women and the Insurance Brokers Association of the State of New York.

"This is the third time that a faction of U.S. commercial competitors has attempted to create punitive tax treatment for non-U.S. competitors in 20 years," he said, referring to an effort led by William Berkley, chairman of W.R. Berkley Corp.

Mr. Berkley testified before the Senate Finance Committee in September on behalf of a 14-member coalition of insurers urging lawmakers to adopt legislation to remedy what they view as an unfair tax advantage for foreign insurance groups.

"Both times before [such attempts] have been rejected by policymakers [who were] really listening to business buyers," Mr. Kading said, noting that the Risk and Insurance Management Society is again showing leadership in the current tax debate.

The coalition led by Mr. Berkley told Congress that non-U.S. insurers based in "tax havens like Bermuda or the Cayman Islands legally avoid paying billions of dollars in taxes on much of their U.S. underwriting and investment income"--a situation, it said, threatens the future of the U.S. insurance industry.

Mr. Kading said, "This current attack is all about protecting one segment of the commercial insurance marketplace by creating punitive tax regimes for competitors that provide good coverages--good choices to the U.S. commercial insurance buyers."

He said that besides RIMS and other buyers groups, European insurers are also part of the debate, "arguing that any attack on the [current tax] system is an attack on ... international trade agreements" that would be unwound by changes.

Mr. Kading said the heart of the argument advanced by U.S. carriers who want to see tax rules changed is the idea that Bermuda companies cede U.S. business to affiliated reinsurers in Bermuda to avoid paying income taxes.

But, he said, "affiliated reinsurance transactions are done by non-U.S. carriers for the same reasons they're done by U.S. carriers not for tax reasons," which "are overstated."

"U.S. carriers use affiliated reinsurance for risk transfer purposes," he said. "They [also] use them to avoid trapped capital," explaining that while there may be licensed entities in specific U.S. jurisdictions that "have historical reasons to exist," those companies "may not be places [where] you want capital to accumulate."

A third reason for using affiliated reinsurance is "to develop capital in flagship organizations," he said.

"If you have the capital in a flagship enterprise, then you have maximum flexibility to deploy that capital and take advantage of business opportunities," Mr. Kading said. Using more simple terms, he said, "You can write more coverage with $100 million in one pot of money than $100 million split into 10 different pots."

Mr. Kading also noted that business placed from the United States to Bermuda is subject to commercial lines excise tax and reinsurance excise tax.