New Insurer Coalition Urges End To Tax Inequity With Bermuda

NU Online News Service, June 16, 4:01 p.m. EDT

WASHINGTON–Bermuda-based property and casualty companies enjoy substantially higher after-tax returns on equity and lower effective tax rates than their U.S. competitors, according to a new report by a coalition of domestic insurers.

The domestic carriers, who call themselves the Coalition For A Domestic Insurance Industry, are lined up to promote passage of a bill they say will restore equity between foreign and domestic insurers.

The measure they support would prevent foreign-owned insurers from moving their U.S. earnings into tax havens through a reinsurance transaction with an affiliate.

It was introduced last year in the House by Rep. Richard Neal, D-Mass.

Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, last December posted his own proposed legislation on his Web site similar to the Neal bill and asked for comment.

According to a spokesman for the domestic Coalition, the Neal bill will be re-introduced in the House before Congress leaves in late June for its July Fourth recess.

The legislation would all but eliminate the estimated billions of dollars in tax revenues lost to the U.S. Treasury each year from such profit stripping, the Coalition argues.

According to the report released today by the Coalition, a one percent excise tax on reinsurance, which is often waived by treaty, "is far too small to offset the tax benefit offered by the current loophole."

According to the report by the Coalition:

o Offshore companies continue to exploit their tax advantage, attracting capital to acquire U.S. companies.

According to the report, "Since Hurricane Katrina in 2005, the insurance sector has raised over $30 billion of new capital, the lion's share going to offshore tax havens."

The tax imbalance has already motivated a number of U.S. companies to move offshore and foreign holding companies to be created to acquire U.S. businesses, further shrinking the U.S. tax base, according to the Coalition, and it said the proposed legislation will have no impact on reinsurance capacity.

"The bill expressly exempts third-party reinsurance written by unrelated parties able to add needed capacity for catastrophic coverage," the report says.

The bill, the report said, merely targets excessive affiliate reinsurance, which adds no capacity to the market as it merely shifts risk from one pocket to another.

It adds that, "affiliate reinsurance can have little impact on the market for direct catastrophe insurance since foreign insurers have only a small share of the market for direct homeowners and commercial multiperil coverage in the coastal states."

The report calls the U.S. insurance market the world's largest and most lucrative, representing almost 50 percent of the world's property and casualty premium.

"Suggesting, as opponents have, that foreign insurance groups will abandon the market rather than compete with domestic insurers on a level playing field is nonsense. The offshore tax advantage has not lowered consumer pricing in the U.S. because pricing in the U.S. market is already extremely competitive," said the Coalition.

"Simply requiring foreign groups to pay their fair share of U.S. taxes will not adversely impact capacity or pricing," its report says.

"There is no reason U.S. taxpayers should continue to subsidize foreign insurers to the detriment of their U.S.-based competitors," said William R. Berkley, spokesman for the Coalition.

"This legislation remedies an inequitable situation and levels the competitive playing field," he continued.

"Foreign insurers have mounted an aggressive campaign to preserve this loophole and their unfair competitive advantage," Said Mr. Berkley.

Mr. Berkley charged that, "Opponents have created a smokescreen of misinformation and scare tactics that grossly overstate the impact of the legislation on the U.S. insurance market. The report issued today completely rebuts the opposition's manufactured arguments."