In 2008 candidate Barack Obama attacked his challenger for the presidency, Sen. John McCain, for defending offshore reinsurance arrangements. An Obama ad claimed McCain wanted “to protect tax breaks for American corporations that hide their profits offshore.”
President Obama has followed up by putting into his 2011 budget a provision—aimed squarely at foreign reinsurers—disallowing deductions for excess non-taxed reinsurance premiums paid to foreign affiliates by a U.S. insurance company. Under the guise of leveling the playing field, the disallowance would generate an estimated $223 million in tax receipts over the next five years. Opponents say this amounts to an additional tax on foreign reinsurance companies, which already pay an excise tax on their income.
The proposal would also bar deductions when the amount of reinsurance premiums paid to foreign reinsurers exceeds 50 percent of the total direct insurance premiums received by the U.S. insurance company.
Though the tax deduction claimed by foreign reinsurers is a negligible portion of the $122 billion international tax provisions in the budget, efforts to eliminate it have been pursued for more than a decade.
Insurer, Consumer Harm
The 50 percent threshold is one of the few differences between the Obama provision and legislation introduced in 2009 by Rep. Richard Neal (D-MA). The Neal bill would base its calculations on an industry average rather than the 50 percent limit.
Opponents of eliminating the deduction contend either proposal would harm foreign reinsurers and American consumers, particularly those in disaster-prone coastal areas.
If the deduction is eliminated, consumers will pay the ultimate price for the financial loss incurred by insurers, as it likely would be recouped in the form of higher insurance premiums. Opponents assert the real cost vastly outweighs the assumed savings and cite an analysis of the Neal bill conducted by The Brattle Group in making their case.
$12 Billion More
The Massachusetts-based economic and financial consulting firm concluded U.S. consumers will pay $10 billion to $12 billion more per year to obtain the same coverage.
In the absence of overseas reinsurers, according to The Brattle Group report, the “financial burden of excess catastrophe risk, in particular, would fall more heavily on government,” and eliminating the deduction “would be imprudent under the best of conditions.”
Considering today’s economic conditions and the likelihood of an increase, not a decrease in catastrophic events, the report concludes, “the ability of the government and private industry to absorb shocks [is] at a historic low.”
Nationally the Brattle Group estimates an increase in the price of primary insurance by 1.8-2.1 percent.Businesses in Florida likely would be hit with a 14 percent increase in the price of commercial multiperil property insurance.
‘Fundamental to Diversification’
“Affiliated reinsurance is fundamental to the diversification of risk, which we witnessed in the months following September 11,” said Brad Kading, president of the Association of Bermuda Insurers and Reinsurers. “These companies covered almost 65 percent of the losses. This legislation should be aimed at the federal tax code, not these companies.”
Kading notes his organization’s members do pay tax on their U.S. business in the form of a U.S. federal excise tax on the reinsurance transactions, and they also pay tax on “ceding commissions” to the U.S. affiliate for reimbursement of expenses.
Joseph B. Sieverling, senior vice president and director of financial services at the Washington-based Reinsurance Association of America, told Business Insurers magazine it is “basic economics” higher taxes on reinsurance transactions “would tend to increase the cost for insurance and reinsurance to consumers, and decrease capacity.”
According to The Hill newspaper, Neal met with lawmakers and senior executives in March to argue his bill was critical to “maintain competitive balance between domestic and foreign insurers and to preserve the U.S. tax base.”
To date, Neal’s bill lacks co-sponsors, and has failed to secure a commitment from the Senate Finance Committee to move forward on a companion bill.
Jennifer G. Hickey ([email protected]) writes from Washington, DC.
“The Impact on the U.S. Insurance Market of a Tax on Offshore Affiliate Reinsurance: An Economic Analysis,” The Brattle Group, Inc.: http://www.budgetandtax-news.org/article/27514.