Battle Begins Over Offshore Tax Proposal

Controversial legislation that would bar foreign-owned insurers from moving their U.S. earnings into so-called "tax havens" through a reinsurance transaction with an offshore affiliate was introduced late last month in the House of Representatives.

The bill–H.R. 3424, introduced by Rep. Richard Neal, D-Mass., who chairs the Subcommittee on Select Revenue Measures of the House Ways and Means Committee–prompted a flurry of responses from groups and individuals on both sides of the issue.

Opposing the bill is the Coalition for Competitive Insurance Rates, which includes Bermuda insurers and members of the Risk and Insurance Management Society. In a statement, the coalition said the bill "would drive up consumer insurance rates by reducing competition and critical U.S. insurance capacity."

"When Rep. Neal introduced similar legislation in the 110th Congress, consumer organizations and businesses that rely on affordable insurance coverage joined in opposing passage," the coalition noted.

But William R. Berkley, chair and chief executive officer of the W.R. Berkley Corp. in Greenwich, Conn., said in an interview that in criticizing the legislation, "Bermuda reinsurers are using scare tactics."

He observed that the United States represents almost half of the property and casualty insurance premiums written in the world. "These people with all this capital are not going to close their companies" if such a bill passes, he predicted.

Regarding the claim that the legislation would make it more difficult and expensive to provide insurance in catastrophe-prone areas, Mr. Berkley said Bermuda insurers primarily write casualty insurance, not property, and then reinsure it offshore with an affiliate. "This does not involve property insurance used to insure homes and businesses," he said. "Bermuda people are just trying to confuse the issue."

Mr. Berkley also said he has become involved because offshore business has evolved from a small component of the p&c industry to a much larger percentage–roughly $35 billion of direct premiums written in the United States. "And, it is growing at a substantial rate," he noted.

Specifically, the legislation would disallow deductions for excess reinsurance premiums with respect to U.S. risks paid to affiliated insurance companies that are not subject to U.S. tax. Rep. Neal said the excess amount will be determined by reference to an industry fraction, by line of business, which will measure the average amount of reinsurance sent to unrelated parties by U.S. companies.

He said the bill "allows foreign groups to avoid the deduction disallowance by electing to be treated as a U.S. taxpayer with respect to the income from affiliate reinsurance."

Thus, he said, the bill merely restores a level playing field, treating U.S. insurers and foreign-based insurers alike. The legislation provides Treasury with the authority to carry out or prevent the avoidance of the provisions of this bill, Rep. Neal said in a statement on the House floor.

But critics of the legislation disagreed.

"Legislation that encumbers the free market movement and the transfer of risk that are vital to a sound global insurance and reinsurance community will adversely affect America's commercial insurance purchasers," said Joseph Restoule, president of RIMS as well as leader of risk management at NOVA Chemicals Corp.

"A free and fair marketplace enables the insured and insurers to seek innovative and affordable alternatives to manage risk," according to Mr. Restoule. "This legislation would drive up the cost of insurance for America's commercial insurance consumers by reducing competition."

Opponents of the bill say the legislation is especially unnecessary because foreign-based insurers are already subject to a U.S. insurance excise tax, and their U.S. subsidiaries also pay U.S. income taxes.

"Rep. Neal's bill is a protectionist measure that will hurt American consumers," said Eli Lehrer, a senior fellow with the Competitive Enterprise Institute. "It's likely to send insurance rates soaring for the very consumers who can least afford big rate increases right now."