Neal Bill, HR 3424, Proponents and Opponents Trade Salvoes

June 29, 2010

When U.S. Representative Richard Neal (D-MA) introduced, or more properly reintroduced, HR 3424, a bill aimed at closing what its proponents describe as a “loophole” in the U.S. tax code, he ignited, or more properly reignited, a longstanding controversy.

Essentially: Should foreign reinsurance companies, principally those based in Bermuda with U.S. affiliates, who write business in the U.S., continue to deduct the payments these affiliates make for reinsurance premiums to their offshore counterparts?

A similar measure, introduced in 2000 failed to be enacted [See IJ web site – ]

Neal’s measure is strongly backed by the Coalition For A Domestic Insurance Industry [], headed by William Berkley, Chairman of Connecticut-based W.R. Berkley Corp. In recent videos and statements he has strongly supported the measure and challenged the position of those who oppose the bill.

They in turn, led by the Washington D.C.-based Coalition for Competitive Insurance Rates [] charge that disallowing the reinsurance premium deduction is discriminatory, thus violating tax treaties, and would raise reinsurance rates charged to U.S. companies, and ultimately U.S. consumers. [See IJ web site –]

Like two mighty battleships, locked in deadly combat, the two sides have fired salvo after salvo at each other, but it’s still unclear which one will sink, and which one will survive.

The latest round in the saga is a press release from the CCIR, in response to a salvo from the battleship Berkley, that “protested inaccurate and misleading statements made by William Berkley.”

HR 3424 would “unfairly raise taxes on the domestic affiliates of foreign-owned insurance and reinsurance companies,” said the CCIR. “Berkley’s coalition inaccurately refers to this bill as closing a loophole, but no such loophole exists; the same U.S. tax law currently applies across the board to all affiliates of insurance companies, foreign or otherwise. This bill exists purely to drive out competition and increase profits for a handful of powerful and successful insurance companies who provide only a small percentage of catastrophe-exposed property coverage across the country.”

The CCIR also cited a report published by the Brattle group in 2009, which concluded that the “Neal bill’s largest negative impact will be on consumers. Despite unsubstantiated claims by Berkley and his coalition, Americans can expect to pay an additional $10 – $12 billion per year in higher insurance costs should the Neal bill become law.”

Dr. J. David Cummins of the Wharton School of Business, one of the authors of the Brattle Group study, stated: “The insurers and reinsurers who are in the crosshairs of the Neal bill provide a significant portion of the insurance coverage in the United States. This irreplaceable global network of companies helps to protect American consumers and their property. William Berkley and his allies have shown no academic or scholarly research or analysis to support their claims that this bill will not hurt consumers. [See also IJ web site – ]

He added that the Neal bill “would create an uneven playing field. Many insurers would be forced to unwind global risk spreading mechanisms and as a result US reinsurance capacity would fall by 20 percent. This in turn would cause consumer prices to rise for business insurance and for property insurance exposed to hurricanes and earthquakes. Even supporters of Berkley’s proposal have warned about unintended consequences from this ill advised proposal. As CEO of a highly profitable domestic insurance company, William Berkley is one of the small number of people who does stand to benefit from this legislation.”

In addition Cummins charged that “Bill Berkley is just wrong when he says that foreign insurers’ US affiliates write only 2 percent of the market. We acknowledge that US insurers collectively write most of the US home insurance market, but that doesn’t mean there is not an adverse impact based on the discriminatory reinsurance tax.

“These are important providers of property insurance and reinsurance protection to the great benefit of US consumers. It is illogical to suggest that this market will not be affected by a punitive 25 percent gross receipts tax on subject affiliated reinsurance premiums. Putting this number in perspective, property-casualty insurers pay federal income taxes that, over time, equate to about 2.3 percent of premiums. This tax is so punitive and confiscatory that it would reduce the supply of reinsurance in the United States by $19–$22 billion. This represents 20 percent of all reinsurance and 40 percent of all foreign reinsurance. In addition, because the tax is confiscatory, it would not raise significant new tax revenues.”

The CCIR’s bulletin also rebutted a number of other assertions made by proponents of the Neal Bill. In conclusion it notes that: “Despite the misinformation spread by Berkley and his coalition, opposition to the Neal Bill has increased, and more than 100 independent groups have publicly written letters expressing their concerns. In recent months, the Neal Bill has come under fire from a wide range of opponents, including foreign governments and the European Union, state insurance commissioners, consumer advocacy groups and business owners across the country.”

Sources: Coalition For A Domestic Insurance Industry and Coalition for Competitive Insurance Rates

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