Obama Budget Would End Offshore Insurers' Tax Edge

Another item would require recipients of punitive damages through an insurance settlement or judgment to pay taxes on that amount.

In response to the provision to eliminate the subsidy for terrorism risk insurers, several insurance trade groups voiced vehement opposition.

"TRIA was reauthorized for a period of seven years as the result of a carefully negotiated compromise," said Blain Rethmeier, a spokesman for the American Insurance Association.

"Any attempt to modify this reauthorization would have a detrimental impact on the availability and affordability of terrorism risk insurance," Mr. Rethmeier added.

Nicole Allen, vice president, communications for the Council of Insurance Agents and Brokers, said that the administration justification for the cut cites a "robust private market" and increased affordability and availability of coverage as reasons that these subsidies are no longer necessary.

But, she said, "the main reason that terrorism coverage is affordable and available is because of the TRIA program.

"The continued existence of TRIA has brought a good deal of certainty and stability to the marketplace, and we hope that will continue," she added.

Matt Brady, a spokesman for the National Association of Mutual Insurance Companies, argued, "The TRIA program was designed to ensure the availability of terrorism coverage required by lenders to avoid the sort of economic freeze we experienced after 9/11, giving businesses and development projects access to the capital they need."

Any cuts to the program "could pose a serious threat to that availability of coverage, potentially bringing those projects to a screeching halt and endangering the jobs they provide," he said.

Property Casualty Insurers Association of America issued a statement saying, "We believe the administration's proposal could have negative ramifications on this important insurance marketplace for companies to access terrorism coverage.

"As terrorist attacks in Britain and Spain showed several years ago, the line between foreign-inspired versus domestic terrorism can often be blurred and it can take months to determine such distinctions. Returning to a 'foreign only' approach for the program will increase uncertainty, making private insurers less likely to write primary terrorism coverage."

The budget provision on punitive damages would apply only to damages paid after Dec. 31, 2011 and, in a twist from previous proposals on the issue during the Bush administration, would be included in the gross income of the person winning the settlement.

The critical budget provision for insurers, however, deals with the so-called "Bermuda tax" and sets the stage for a long-anticipated showdown in Congress next year between the offshore insurers and their U.S. rivals.

Specifically, the provision says that the administration seeks to disallow the deduction for excess non-taxed reinsurance premiums ceded to all foreign affiliates. It would disallow 50 percent of the tax credit.

"Under the proposal, a U.S. non-life insurance company would be denied a deduction for certain excessive non-taxed reinsurance premiums paid to foreign affiliates,

Bradley Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers, Washington, D.C., confirmed that the comment refers to the controversial issue. He said the provision is a "general reference to the issue that affects all non-U.S. insurers that do business with U.S. affiliates."

But, he was unable to immediately obtain any additional information.

The tax advantage exists because current tax law allows the U.S.-based affiliates of offshore insurers to cede a large share of their property casualty premiums to the reinsurance units of their parents, which are based in low-tax or no-tax jurisdictions, such as Bermuda.

Under the scheme, the U.S. subsidiary deducts the premium and the foreign parent company does not pay U.S. or local tax on the premium while earning investment income subject to low or no tax.

This occurs because related-party reinsurance does not result in a transfer of risk outside the global group. "Thus, it is an efficient way of significantly reducing U.S. tax without transferring risk," according to a discussion draft on the issue released by the Senate Finance Committee last year.