An industry executive, representing a coalition of 14 large U.S.-based insurance groups, told the U.S. Senate Finance Committee on Wednesday that a major tax advantage for certain foreign insurance groups could threaten the future of the domestic insurance industry.
The tax advantage allows foreign insurance groups based in places such as Bermuda or the Cayman Islands to legally avoid paying billions of dollars in taxes on much of their U.S. underwriting and investment income, says William R. Berkley, chairman and CEO of W. R. Berkley Corporation and spokesman for the Coalition for a Domestic Insurance Industry.
The tax advantage, which originated in practice around 20 years ago, has already caused significant migration of insurance capital abroad, he said. Berkley said the tax advantage permits foreign-based insurers with U.S. affiliates to move much of their taxable underwriting and investment income from their U.S.-based businesses out of the country merely by reinsuring the business with a foreign affiliate in a low-tax or no-tax jurisdiction. This type of reinsurance transaction generally requires a mere bookkeeping entry to shift revenue from one pocket to another and out of the reach of U.S. taxing authorities, Berkley noted.
“By contrast, U.S.-based insurers must pay current U.S. tax on all of their income from these policies,” he told the committee. “Thus, even though the U.S. income-generating activities are the same, these foreign-domiciled insurers can avoid U.S. tax on much if not all of their underwriting and investment income.”
According to data cited in Berkley’s testimony, growth in related-party reinsurance written to foreign affiliates has been dramatic. In 2006, $54.7 billion of U.S. premiums went to foreign insurance companies, with nearly 60 percent ($32.5 billion) of those premiums going to related foreign reinsurance companies. Since 1996, U.S. premiums going to affiliated foreign reinsurers have increased at a compound annual growth rate of 23.3 percent, a rate that will push premiums going to foreign affiliates over the $100 billion mark by 2012.
In addition to avoiding U.S. taxes on the related offshore underwriting income, Berkley said that at the end of 2006 more than $70 billion of assets held offshore were owed by affiliated foreign reinsurers to related U.S. insurers as a result of affiliated reinsurance transactions. These assets earn significant investment income every year outside the reach of U.S. taxing authorities.
“The data also demonstrates that the principal incentive for this increased related-party reinsurance activity has been the avoidance of U.S. income tax,” he concluded.
Over a period of nearly 20 years, this tax advantage has put considerable competitive pressure on domestic insurance companies to relocate to low-tax or no-tax jurisdictions — a number of companies already have done so. Berkley added that failure to address this and begin “leveling the playing field” could further diminish the U.S. capital base and deprive the U.S. Treasury of billions of dollars in tax revenues from those companies.
Berkley also said that the proposed legislation is not meant to effect foreign reinsurers providing third party reinsurance to unaffiliated U.S. insurers. Consequently, it would not effect the market for catastrophe coverage that protects Americans from natural disasters.
In a letter, the Coalition also urged House Ways and Means Committee Chairman Charles Rangel and Ranking Member Jim McCrery to adopt legislation to remedy the situation, predicting that in the absence of corrective legislation, “foreign-domiciled insurers will continue to use their tax advantage to gain a greater share of the U.S. insurance market.” As evidence, the letter cited an alarming increase in the amount of related-party reinsurance written to foreign affiliates — an amount that grew from $15.9 billion in 2001 to $32.5 billion in 2006, most of which went to affiliates in low-tax or no-tax jurisdictions.
Throughout Berkley’s testimony, and in the Coalition’s letter to the leadership of the House Ways and Means Committee, the group emphasized that it was not looking for any special treatment or consideration but sought only an end to an unfair competitive tax advantage that favors foreign-controlled insurers at the expense of domestic insurers.
In addition to the W.R. Berkley Corporation of Greenwich, Conn., the Coalition for a Domestic Insurance Industry includes: AMBAC Financial Group Inc., New York, N.Y.; American Financial Group Inc., Cincinnati, Ohio; Berkshire Hathaway, Omaha, Neb.; The Chubb Corp., Warren, N.J.; EMC Insurance Cos., Des Moines, Iowa; The Hartford Financial Services Group Inc., Hartford, Conn.; Liberty Mutual, Boston, Mass.; Markel Insurance Co., Glen Allen, Va.; MBIA Insurance Corp., Armonk, N.Y.; Safeco Corp., Seattle, Wash.; Scottsdale Insurance Co. (a Nationwide subsidiary), Scottsdale, Ariz.; The Travelers Cos. Inc., St. Paul, Minn.; and Zenith Insurance Co., Woodland Hills, Calif. As a group, the Coalition has more than 150,000 employees, and total assets in excess of $1 trillion with offices and employees located throughout the United States.
Source: Coalition For A Domestic Insurance Industry