Risk Managers Like, Don’t Like, Obama Budget Reinsurance Proposals

February 15, 2011

Risk managers have found things to like, and not like, in President Barack Obama’s budget proposal for the 2012 fiscal year.

The Risk and Insurance Management Society (RIMS) expressed its continued opposition to a proposal in Obama’s blueprint that caps the deductibility of reinsurance premiums paid by domestic companies to foreign affiliates.

But the group is applauding the Administration’s budget provision that would continue having the federal government serve as a backstop for terrorism risk insurance.

RIMS says it opposes anything that might have a “detrimental impact” on its members, commercial insurance policyholders.

John Phelps, director, business risk solutions, Blue Cross and Blue Shield of Florida, Inc. and a RIMS board member, said that the reinsurance premium deductibility proposal contained in the Administration blueprint would constrain the insurance market for commercial insurance policyholders and drive up costs for businesses.

The Obama FY 2012 budget appears to adopt, in concept, a proposal similar to legislation that has been introduced in the House of Representatives by Rep. Richard Neal, D-Mass.

The Neal measure is opposed by foreign reinsurers but supported by a coalition of domestics who argue it closes an unfair tax loophole. Supporters of the Neal measure maintain that the reinsurance premium deduction is discriminatory and violates tax treaties.

But RIMS sees it differently.

“This proposal would have a chilling effect on these insurers and reinsurers who provide an important safety valve in many areas of the country, including my own state of Florida,” said Phelps. “The proposal ignores sound risk management procedures and would inhibit domestic companies with foreign affiliates from engaging in a legitimate risk management practice; ceding reinsurance to an affiliate in order to provide for greater capacity and liquidity.”

RIMS said it is pleased, however, that the Administration’s budget continues the federal commitment to serve as a backstop for terrorism risk insurance.

The President’s Working Group on Financial Markets recently acknowledged that without the federal government support, it is highly unlikely that terrorism risk insurance would continue to be available at coverage levels and prices in effect today.

The 2007 legislation establishing the federal terrorism program does not expire until 2014.

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