The Obama administration's 2012 budget proposal has reopened the debate over taxing certain reinsurance premiums ceded to foreign insurers by their U.S. affiliates.
The administration's plan would tax these premiums to a greater extent than a similar plan contained in the 2011 budget proposal. The administration projected the tax to raise $2.6 billion over 10 years, compared to the 2011 plan that would have raised $519 million in additional revenue.
But the administration's planned tax revenue from the plan is still far less than the taxing approach supported by Rep. Richard Neal, D-Mass. His proposal, which would disallow a deduction for "excess non-taxed reinsurance premiums" paid by the U.S. units of offshore insurers to offshore reinsurance affiliates, was projected to raise $17 billion over 10 years.
The administration's latest plan would deny any deduction for reinsurance ceded to a foreign affiliate or its parent to the extent that the foreign parent is not subject to U.S. income taxation on the premium. It would also impose other changes in current tax policy to raise revenues from this source.
The administration's plan is among a number of cuts and tax increases sought by President Barack Obama in his proposed $3.7 trillion 2012 budget. The taxing plan prompted support from U.S. insurers who have been promoting such a tax for more than a decade—and strong opposition from foreign-based insurers as well as the Risk and Insurance Management Society (RIMS).
In voicing support, William R. Berkley, chairman and CEO of W.R. Berkley Inc., Greenwich, Conn., said, "We are pleased that the president has included a proposal to close the tax loophole for affiliated offshore reinsurance."
Mr. Berkley said this provision "would not only generate much needed revenue, which helps balance our budget, but more importantly, the tax revenue would be derived from income generated in the United States."
He said that without such legislation, "our country, which generates almost half the world's property and casualty premium, will find the companies that provide property and casualty insurance to businesses in the U.S. all domiciled offshore."
"Taxes are a part of doing business in the United States. It is what allows our free society to survive," he added.
But, the Coalition for Competitive Insurance Rates, a group of foreign insurers and reinsurers, immediately sent a letter to key members of Congress objecting to the administration's plan.
The letter charged that "this proposal is being advocated as a possible tax revenue offset by a small group of very large U.S. insurance companies. With the enactment of this tax, these companies intend to create a U.S. market share advantage for themselves at the expense of individual and commercial insurance consumers. We oppose these proposals."
Mr. Berkley acknowledged that the proposal is "stronger" than that proposed by the administration in its 2011 budget.
W.R. Berkley, the Chubb Corp. and the Hartford are the strongest supporters of the tax. They argue that being able to cede U.S. premiums to foreign affiliates that are taxed at a lower rate gives an advantage to foreign insurers.
RIMS reiterated its opposition to the plan. John Phelps, director, business risk solutions, Blue Cross and Blue Shield of Florida Inc. and board liaison of the RIMS External Affairs Committee, said, "Despite long-standing opposition by policymakers on a bipartisan basis, the Obama administration continues to pursue a policy which is harmful to insurance consumers by capping the deductibility of reinsurance premiums paid by domestic companies to foreign affiliates."
The administration's budget proposal also brings up the issue of levying the so-called "TARP tax," a levy on financial companies with $50 billion or more in assets who have broker-dealer affiliates. But the administration has lowered the amount it would raise through such a tax to $30 billion from $48 billion over 10 years.
On the positive side for insurers, the budget proposal sustains current support for the Terrorism Risk Insurance Program. That support had been questioned by some administration budget analysts over the past year.
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