Arguments Heat Up Over Tax Treatment Of U.S. Risks Ceded To Bermuda Insurers

Competing U.S. and Bermuda insurance interests have been ramping up lobbying efforts on Capitol Hill over a proposed tax code change that would impact treatment of U.S. business ceded to Bermudian carriers.

The issue has been heating up since last December when, following a hearing, Sen. Max Baucus, D-Mont., chair of the Senate Finance Committee, issued a draft proposal to disallow the ability of foreign insurers to deduct excess non-taxed reinsurance premiums ceded by their U.S. affiliates to offshore units.

The draft generated 35 responses in opposition from state regulators, foreign governments, U.S. trade interests, consumers, the Risk and Insurance Management Society, and insurers and trade associations. These included letters from the governments of Germany and Switzerland.

Supporters of such legislation are led by William R. Berkley, president of the W.R. Berkley Company, who heads the Coalition for a Domestic Insurance Industry. This group represents 14 of the largest domestic commercial lines and financial guarantee insurance groups.

This group produced 22 support letters–13 of which were written by employees of Berkley and the Chubb Group.

"Plain and simple, it is untenable for the U.S. tax code to favor foreign-owned insurance companies over domestic insurers in selling insurance in the U.S.," wrote Mr. Berkley in his letter as the coalition's representative.

He said the problem arises "because a loophole in current law allows foreign-controlled companies to avoid tax on much of their U.S. underwriting and investment profits merely by reinsuring this business with a foreign related party located in a low-tax or no-tax jurisdiction."

In opposition, Bradley Kading, president and executive director of the Association of the Bermuda Insurers and Reinsurers–which has offices both in Bermuda and Washington–sent a comment letter against the tax treatment proposed by the domestic coalition.

He said the bill "would deliver a competitive advantage to U.S.-based insurance groups by imposing disproportionately higher taxes on their foreign-owned competitors who enter reinsurance arrangements that are typical within related groups of insurance companies."

Specifically, he said, the proposed provision amounts to a gross basis tax on ceded premium in excess of an arbitrary limitation. "This occurs because the tax deduction for the ceded premium is disallowed and no tax deduction is permitted for the losses ceded to the offshore affiliate," he explained.

The ABIR letter said the U.S. "normally respects the sovereign rights of other countries to design their own tax systems," but that in this case the discussion draft "appears to be aimed at foreign insurers that happen to be headquartered in jurisdictions with statutory corporate tax rates that are lower than the U.S. rate (which category would include all other industrialized countries, with the exception of Japan)."

RIMS President Joe Restoule, leader of risk management at NOVA Chemicals Corp., said in his comment letter that the proposal "would significantly limit access to reinsurance, thus reducing capacity and driving up costs, which would be extremely harmful to American businesses–particularly given the current economic conditions."

The argument has been escalating even though no legislation has been introduced in either house of Congress this year to implement the proposal, and none may be immediately forthcoming.

In a recent note to investors, Sam Leaman of Washington Analysis said it was unlikely Congress would move to implement the provision this year.

First, he said, the Obama administration has not "come out with a clear statement on this issue," adding that "it is controversial."

Moreover, "since Congress has a number of priority issues to deal with, we are skeptical that it will be able to complete work on it this year," Mr. Leaman said.

In fact, according to Mr. Kading, the only reason Congress would likely act to tighten current regulations regarding ceding of premiums is in the context of a strong need to finance a program which has broad support in Congress.

He guessed that the next step in the process might be a hearing by a House Ways and Means subcommittee.