Berkley: Proposed Tax Won't Cause Exodus By Foreign Carriers

In the letter to Treasury, Angelos Pangratis, acting head of the European Union, had warned that higher premiums or even "the withdrawal of non-U.S. operators from the U.S. reinsurance business" could be the end result of a tax scheme being championed by the U.S. insurer coalition.

Specifically, the U.S. coalition supports a proposal to deny U.S. tax deductions for reinsurance premiums paid to offshore affiliates. The deductions to be denied would relate only to premiums paid in excess of the industry average ceded to unaffiliated third parties for each insurance line of business.

The proposed scheme was included in a bill, H.R. 3424, first introduced last year by Rep. Richard E. Neal, D-Mass. The Obama administration supported the legislation through similar provisions in its 2011 budget proposal. (Bill text is available at http://bit.ly/955iXr)

"We think there's a reasonable chance that it will see the light of day" and be pushed through Congress this year, Mr. Berkley said during the press luncheon.

Focusing some remarks on Bermuda rather than European reinsurers, Mr. Berkley reviewed the history of a tax change in 1986, and the launch of "an avalanche of reinsurers" in Bermuda after Hurricane Andrew. He noted that these companies expanded into writing insurance business directly by setting up subsidiaries in the United States "in competition with U.S. companies," and reinsured this business to their Bermuda reinsurance affiliates, "paying no [U.S.] taxes" on it.

"This has nothing to do with arms-length reinsurance" provided to unaffiliated third parties, he added. "We buy most of our reinsurance from offshore reinsurers. It has everything to do with them setting up direct writing insurance companies [that have an unfair competitive tax advantage]."

Bradley Kading, president and executive director of Association of Bermuda Insurers and Reinsurers in Washington, said Mr. Berkley is incorrect that foreign insurers are "paying no taxes" on affiliated business. "The Bermuda insurers with U.S.-affiliated business pay U.S. income taxes on their U.S. business profits and pay a gross receipts tax on their cross-border affiliated and non-affiliated business," he noted.

In addition, he explained that a U.S. federal excise tax of 1 percent of gross revenue is "paid regardless of whether profit was earned on the reinsurance transaction."

Finally, Mr. Kading noted that "on average, non-U.S. reinsurers use the same amount or less affiliated reinsurance than [their] wholly U.S.-owned competitors."

"These are not tax-driven transactions. This is about pooling risk and achieving the benefits of diversification," he said in an e-mail. "That's why U.S. insurers use affiliated transactions, too. Real risk is transferred and real losses accrue to the non-U.S. insurers when these transactions are not profitable."

At the press luncheon, Mr. Berkley reacted to a reporter's observation that EU officials view the proposal as a violation of U.S. tax treaties, saying that such an interpretation shows the officials "need to have some reading lessons in English."

The "cornerstone of the [tax] treaties" is that you can't tax offshore insurers in such a way that they are adversely impacted when compared to U.S. counterparts.

"They have the option of having their U.S.-based company be taxed as we are taxed," Mr. Berkley said. Therefore, "in no way does it put them in a position of having an adverse tax [position] versus the U.S. [companies]."

Separately, Gary Hufbauer, a senior fellow at the Washington-based Peterson Institute of International Economics, said the tax scheme being pushed by the Coalition is discriminatory. "To be sure, nowhere does the bill contain a title headed, 'Discrimination Against Foreign-Owned Insurance Companies,' [but] the terms of the bill clearly apply to foreign-owned insurance companies, not their U.S.-owned competitors," he said.

Mr. Hufbauer argues that the bill's limitations on tax deductions apply only to payments made to foreign-based reinsurers, and not to payments made to U.S.-owned or U.S-based reinsurers.

He said it accomplishes this by defining the term "affiliated non-taxed insurance premium" as any reinsurance premium paid directly or indirectly to an affiliated corporation if that premium is neither U.S.-owned nor subject to U.S. tax.

Mr. Kading called the proposal "protectionism, pure and simple. If Brazil, India or China proposed this tax, the United States would strongly fight it as an asset localization requirement or as a mandatory reinsurance purchase requirement from domestic reinsurers."

Weighing in on the consequences for insurance buyers, Mr. Kading said, "Bill Berkley is a very successful businessman, but he is dead wrong on the policy implications of this issue for U.S. consumers."

Referring to statements periodically released by the Risk and Insurance Management Society, he said consumers "want non-U.S. insurers in the market because they add capacity and promote competition. The reinsurance tax would be a disaster for U.S. consumers."