Tax Disparities Still Driving Insurer Business Decisions, Industry Leaders Say

He said policyholders who put in capital were not motivated by tax issues, but rather because the carrier could be more nimble and get products into the market faster in Bermuda, which had one regulatory regime, rather than 50 different insurance commissioners, as in the United States.

"It was a regulatory aspect to it that trumped anything else," he said, adding that while there was a benefit in Bermuda's tax structure, "that wasn't the initial motivation."

Lord Peter Levene, chair of Lloyd's, said that while the industry has become largely globalized, and through the Solvency II initiative the European Union is being brought under one regulatory standard, "everyone seems to forget there is another huge issue here that is totally non-globalized, which is tax."

"So you're running an industry, in which everyone should play by the same rules with regulation, and by the way, how much tax should you pay?" he said. "That really doesn't make sense and that's a problem, because you're then getting companies making otherwise illogical business decisions, simply because they're going to pay less tax by doing that."

He said companies are "moving their management somewhere that it doesn't need to be, logically, but because by doing that, they can pay less tax."

This is an issue, he said, that "needs to be addressed, and I think the problem with all of this is the politics. Politicians running campaigns may not be concerned with the facts regarding the insurance industry."

He noted, however, that there are no easy answers. Taxation disparities, he said, creates a "huge gap [among domiciles], and I don't think anybody has yet come out with a sensible way of dealing with it. Because what is a fair rate of tax?"

If one country, such as the United States, raises taxes, ultimately the consumer must pay, said Stefan Lippe, CEO of Swiss Re Company Ltd.

"This is the discussion we should drive," he said. "You have to talk a different language and say it will be more expensive for your voters"–who are, he added, "the general assembly of the politicians."

Economically, in many cases, he said, it makes sense having capital come from the outside to support the industry–even in the United States. If you look at major losses, such as the World Trade Center attack and Hurricane Katrina, Mr. Lippe observed, "more than 50 percent were paid out of the U.S."

Neill Currie, chief executive officer of RenaissanceRe, who moderated the discussion, asked about the proper role of government.

"Who is the U.S. government regulator?" said Lord Levene. "There isn't one–it's difficult to answer that question." He noted that the debate going on at the moment is that "if the U.S. is concerned about Solvency II, who is your spokesperson? And so I think the [federal] government should get involved, particularly because it's a globalized industry."

"You have international negotiations and the U.S. [insurance industry] doesn't have anyone to speak for it. That's the first thing to deal with," he said.

As for problems in financing exposures in catastrophe-prone areas, Mr. Duperreault observed there is plenty of capital for Florida risks, for example, but providers want to be paid too much in the public's view, so prices are suppressed through a government scheme.

"When I started in the business, solvency was secondary to price fairness, but that shifted to more free market, open rating where everything had to be filed," he said. "More and more classes of business opened up so there would be competitive pricing and there wouldn't be government control of pricing. Now that's coming back–it's coming back in an indirect way."

He said government insurance schemes that are underpriced are effectively nationalizing the business.

The debate over health insurance, he added, is "very similar, where the federal government is talking about imposing limitations on pricing, but not taking over the regulation totally. So they're leaving the states to the solvency side and they're only going to do pricing."

He noted, however, that "if you just do pricing, it puts the states in a very difficult situation, because they lose one of the balancing acts of price and solvency."

Mr. Duperreault noted that when he first arrived at Marsh & McLennan, he was shown many innovations by the staff of reinsurance broker Guy Carpenter, such as technical modeling–capabilities he said he wasn't aware of when buying reinsurance in his prior job as head of ACE.

"What's happened is that [lately] the intermediary has been required to do more and more in servicing to justify their existence with the buyer," he said. "So they have to put more money into technical things, such as actuarial and analysis."

This leads the way, he noted, to a "have and have-not situation, where if the intermediary can't keep up with the demands of the product, they may be marginalized, and you're forcing concentration in a few players who have all the tools the buyer is requiring."

He warned that "what's happening is that for the same price, you'd better do more."