“Roundup the usual suspects;” here we go again. No, it’s not an unsolved murder in wartime Casablanca, simply the latest skirmish in the ongoing dispute over whether companies that write reinsurance in the U.S. market are using tax havens to avoid paying a fair share of the taxes they would otherwise owe on the premiums they earn.
The last time the subject was seriously considered was in 2010 when the House Ways and Means Committee considered HR3424, a bill introduced by Rep. Richard Neal (D-MA), to tax foreign-based insurers and reinsurers. It failed, as have Neal’s other efforts to right what he, and a number of U.S. insurers, see as a loophole that allows the reinsurers, mainly based in Bermuda, to escape U.S. taxes.
As a report from A.M. Best points out, however, the foreign reinsurers do pay a federal excise tax (FET) on the premiums they cede back to a “tax exempt country,” which is usually Bermuda. The FET is 4 percent on P&C premiums and one percent on life premiums.
The attempt to change those provisions resurfaced when it was included in President Obama’s proposed budget for 2014. If adopted, which at this point seems highly unlikely, the proposal would defer a tax deduction for reinsurance premiums paid to foreign affiliates by domestic insurers, thereby closing what proponents of the measure describe as a “tax loophole that costs the Treasury billions of dollars in tax revenues annually and provides foreign-based insurance groups a significant, unfair advantage over their U.S. competitors.”
The usual suspects are out in force. A bulletin from the Coalition for a Domestic Insurance Industry (CDII) cites William R. Berkley, Chairman and CEO of W. R. Berkley Corporation, a coalition member, as asking the rhetorical question: “Would Congress ever intentionally pass a tax subsidy only applicable to foreign-based companies? The answer is clearly no. At a time of burgeoning deficits and possible tax increases on U.S. workers and businesses, it’s unfathomable that we would continue this unintended loophole allowing foreign-based insurers to avoid U.S. tax on their U.S.-based business.”
Characterizing the “foreign-based insurers” as tax avoiders, however, is a bit disingenuous. As the IJ said in an earlier article, it creates “visions of stealthy Swiss bankers and bowler hatted Englishmen poaching America’s righteous worth.”
In fact the Bermuda-based entities, which comprise the “usual suspects” on the other side, are almost entirely American in origin, beginning with ACE and XL. The newer ones, and their founders and capital providers, created after the Sept. 11 attacks, include the following:
– Endurance Specialty Insurance Limited – Aon and Zurich.
– Allied World Assurance Co. – AIG, Chubb, Goldman Sachs
– Axis Capital Holdings – Marsh’s Trident II Investment Trust, CSFB, The Blackstone Group, J.P. Morgan and Thomas Lee
– Arch Capital – Warburg Pincus and Hellman & Friedman private investment funds
– Montpelier Re – White Mountains Insurance Group and Benfield (now part of Aon)
– Platinum Underwriters – spun off from The St. Paul, as well as
– Harbor Point Limited, established in 2005 by Trident III, L.P., a private equity fund [set up by MMC Capital], now managed by Stone Point Capital, which acquired the ongoing business of Chubb Re, Inc. That somewhat explains why Chubb has taken a back seat in these discussions.
Bradley Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers (ABIR) has been in the forefront of those opposing any change in the tax laws for the last seven years. Addressing this current attempt, he described it as a “direct attack on the business models of international reinsurers.”
Kading and the ABIR, in association with the Coalition for Competitive Insurance Rates (CCIR), have been making the same points in opposition to similar measures that have surfaced in four of the last five Obama budgets.
Kading’s position takes into account the overall picture of international reinsurance, “for whom the ability to pool risk globally onto a central balance sheet is key,” he said. “In doing so, re/insurers are able to diversify their sources of risk, enabling them to write more capacity and ultimately helping the end consume.” The proposed changes in the tax law threaten to bring this to an end.
In response the CDII charges that “domestic insurance companies with foreign-based parents can escape U.S. tax on much of their underwriting and investment income derived from their U.S. business merely by reinsuring this business with a foreign affiliate in a low-tax or no-tax jurisdiction. This provides them an advantage over domestic groups in attracting capital for writing insurance to cover U.S.-based risks and erodes our tax base.”
They also assert that changing the tax provisions will “not affect third-party reinsurance that enables America to manage volatile, catastrophic insurance risk — those arrangements that add overall capacity to the market by shifting risk to unrelated parties.”
That remains the key question in determining whether or not the government is losing revenue through a tax loophole, or is assuring that catastrophe coverage in the U.S. remains available and competitive. The only way to determine who’s right is to replace the current tax provisions, and then wait and see if there’s less P&C reinsurance catastrophe coverage available, and/or if the cost of acquiring it increases. In the past taking that step has been rejected, as it is seen as too full of unknown consequences, which could largely offset any revenue gains.
The CDII also states that any lessening of capacity or increased premiums would be offset by the U.S. domestic market. It cites a report from the LECG group, a global expert services and consulting firm, which concludes that it’s “highly unlikely that foreign groups would stop providing coverage in the U.S. market if they were required to pay tax like U.S. companies because prices are set by the competitive market.”
A look at the U.S. domestic market raises some questions about that statement. Any change in the tax law would primarily affect P&C catastrophe reinsurers, i.e. companies that take on the risks of devastating disasters like Hurricane Katrina and Superstorm Sandy, as well as the tornadoes, earthquakes and brush fires that regularly strike parts of the U.S.
According to A.M Best, the U.S. “accounts for more than 70 percent of global cat risk, and foreign insurers and reinsurers absorb approximately 50 percent of the total losses on U.S. cat events.” This coverage is vital, and it is likely to become more so in the future.
It is hard to see where else it will come from other than those companies, which aren’t all that foreign, currently providing it, as only one large U.S. reinsurer remains in the mix – General Re. Any significant decrease in capacity and/or increased reinsurance premiums would inevitably threaten the current balance, which, while by no means perfect, has served the U.S. consumer quite well over the years.
Topics Catastrophe Carriers USA Reinsurance Property Casualty
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