Reinsurance Tax Debate over HR 3424 Heats Up at Committee Hearing

July 15, 2010

Both sides presented their views at a hearing of the House Ways and Means Committee on Wednesday, July 14. Compromise over whether or not to disallow deductions for premiums paid to purchase reinsurance from “affiliated companies,” who are located outside of the U.S., doesn’t seem likely.

Stephen E. Shay, Deputy Assistant Secretary (International Tax Affairs) of the U.S. Department of the Treasury, which largely supports the Bill, led off the debate. He described the background, which led to Rep. Richard E. Neal (D-MA) to prepare and propose HR 3424, as follows: “Where all of the parties involved are U.S. taxpayers, the premiums paid for reinsurance will give rise to a deduction for the insurer, and corresponding income for the reinsurer, and the group’s overall U.S. tax position will remain effectively unchanged. Thus, in the purely domestic context, affiliate reinsurance allows insurers to efficiently allocate capital, generally with no change to their overall U.S. federal tax burden.” This also generally applies to the affiliates of U.S. companies.

However, Shay pointed out that “in the case of a foreign-owned group, reinsurance of U.S. risks with a foreign affiliate can result in a significant reduction in the overall U.S. taxation with respect to those risks. While a domestic subsidiary of a foreign parent is entitled to a deduction for reinsurance premiums paid to a foreign affiliate, the income of a foreign affiliate from reinsuring U.S. risks, including investment income on assets supporting its reserves, is not subject to U.S. income tax unless the foreign affiliate carries on business in the United States. (The premiums may be subject to the one percent excise tax, unless it is waived by treaty.) As a result, a foreign-owned insurance company reinsuring a U.S. risk with a foreign affiliate can achieve a significantly lower U.S. tax burden with respect to insurance of U.S. risks.”

Chubb Corp’s Vice-Chairman and COO John J. Degnan and William R. Berkley, Chairman and CEO of the Connecticut-based W.R. Berkley Corporation, who also heads Coalition For A Domestic Insurance Industry, presented their arguments in support of the Bill.

Degnan described the current situation as an “unintended affiliate reinsurance loophole,” which the Neal Bill “seeks to close.” He added that failure to collect taxes on reinsurance affiliates “costs the Treasury and U.S. taxpayers billions in revenues.” He also accused foreign-owned insurance companies of enjoying a “de-facto tax holiday on much of their U.S. business,” which places “U.S.-owned companies at a severe disadvantage in raising capital.”

Berkley reminded the Committee that he speaks for “twelve other major domestic commercial lines and financial guarantee insurers with 150,000 employees located across the United States.” He reinforced the stance taken by Shay and Degnan, that allowing “foreign-domiciled insurers with U.S. affiliates to use related – party reinsurance transactions to strip their profits from both underwriting and investment activities out of the U.S. tax base (where the income was generated) to a more favorable tax jurisdiction” gives them an unfair tax advantage over U.S. insurers.

Berkley also met two of the major objections to the Neal Bill head on. “Contrary to the opponents’ claims, the bill will have little or no impact on the availability or cost of catastrophic coverage in coastal areas or other U.S. markets, because the bill does not impact third party reinsurance which provides needed capacity for catastrophic coverage,” he stated.

He also disagreed with assertions that adopting HR3424 would conflict with other U.S. legal strictures. “Fixing the loophole is not protectionist and does not violate tax treaties or trade agreements,” Berkley stated, as it “does not favor domestic companies over foreign competitors, but rather ensures that U.S. insurers and their foreign–â€based competitors are taxed similarly in writing U.S. business.”

Sean M. Shaw, Insurance Consumer Advocate for the State of Florida, then told the Committee members why his office opposes the Neal Bill. “My job is to advocate for Florida insurance consumers,” he stated. “That is why I’m here today opposing the imposition of any extra tax on international reinsurers.”

The essence of his position is set out in the following statement: “Overseas insurers’ US affiliates write 14 percent of the home and property insurance in the Gulf and Atlantic States. These insurers provide 11 percent of home insurance and 40 percent of business property insurance in Florida.

“International insurers and reinsurers are particularly important in the difficult times that follow natural and man-made disasters. According to available public data, there were only six domestic insurance companies among the 29 insurers who have reported losses from the oil rig explosion in the Gulf of Mexico. With Hurricanes Katrina, Wilma and Rita in 2005, more than 60 percent of the $59 billion in payments came from foreign insurers and reinsurers.

“Quite simply, if you choose to impose a punitive tax on insurance, consumers will have less insurance. And they’ll pay more for it.”

Shaw also reminded the Committee that his side has a lot of support as well. “More than 120 opponents of HR 3424 and similar measures have written to Congress emphatically expressing their disagreement,” he stated. “These opponents – many of whom agree on little else – include state legislators and other public officials from both parties, consumer advocates, leaders from the insurance industry, and the business community, and the insurance commissioners in Louisiana, Mississippi, North Carolina and South Carolina.”

Shaw also cited studies by the Brattle Group which support his side’s position [See IJ web site https://www.insurancejournal.com/news/national/2010/07/13/111518.htm]. ThIJ article also contains references to the positions of the main pricipals in the debate.

The full statements of all four men who addressed the Committee, as well as the opening remarks made by Chairman Neal, may be obtained on the House Ways and Means Committee’s web site at: http://waysandmeans.house.gov/hearings/hearingDetails.aspx?NewsID=11251].

Source: House Ways and Means Committee

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