Coalition Applauds Bill to Level Playing Field

The Coalition For A Domestic Insurance Industry, a group of 14 major U.S.-based insurance groups, is applauding the introduction of a bill by Rep. Richard Neal (D – Mass.) to level the playing field and close the current loophole that provides foreign-based insurers a competitive advantage over domestic insurers in underwriting U.S. risks.

According to the coalition, this unfair tax advantage arises because foreign insurance groups operating in the U.S. are presently allowed to strip the bulk of their profits out of the U.S. merely by reinsuring risks to affiliates located in tax havens, and thus avoid paying billions of dollars in U.S. taxes. The tax treatment of these transactions undermines the ability of domestic companies to compete and ultimately threatens the future of our domestic insurance industry.

“The tax advantage, which originated in practice around 20 years ago, has already caused significant migration of insurance capital abroad,” explained William Berkley, chairman and chief executive officer of W. R. Berkley Corporation and spokesman for the Coalition For A Domestic Insurance Industry.

According to the coalition, growth in related-party reinsurance written to foreign affiliates has been dramatic. In 2007, $58.4 billion of U.S. premiums went to foreign insurance companies, with nearly 60 percent ($33.8 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 21.4 percent.

“With the stroke of a pen, foreign-based groups can shift their profits overseas to affiliates in tax-advantaged locations. The principal incentive for this increased related-party reinsurance activity has been the avoidance of U.S. income tax,” Berkley concluded.

According to the coalition, over a period of nearly 20 years, this tax advantage has put considerable competitive pressure on domestic insurance companies to relocate to (or lines of business to be sold to companies already located in) low-tax or no-tax jurisdictions—a number of companies already have done so, either by inverting or otherwise. 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. With one of the largest U.S. insurance companies currently having to sell off a considerable portion of its insurance assets to ensure its survival, it is essential that we act immediately to shore up the U.S. market.

The coalition believes offshore reinsurers are already using inflammatory language to put up a smokescreen in an attempt to play on the fears of Congress and the American public by arguing that legislation will diminish the benefits that the offshore reinsurance community provides to the U.S. But that is simply ridiculous. The bill would only apply to certain excessive non-taxed reinsurance premiums paid to affiliates with respect to U.S. risks. It does not affect foreign reinsurers providing third party reinsurance to unaffiliated insurers. Consequently, it will have no effect on the market for catastrophe coverage that protects Americans from natural disasters or the market for crop insurance because in those cases, companies buy reinsurance from unaffiliated reinsurers. It will not cause prices to rise, nor will it prevent coastal residents from obtaining insurance to protect them from hurricanes. The primary insurers for homeowners in the U.S. are U.S. based.

The coalition concluded that the legislation is intelligently crafted because it levels the playing field for domestic and foreign domiciled insurers without abrogating treaties, violating non-discrimination clauses of existing treaties, negatively impacting the insurance and reinsurance markets, or impacting jobs in foreign domiciles. It does not afford any special treatment or consideration but only reduces an unfair competitive tax advantage that favors foreign-controlled insurers doing business with their affiliates at the expense of the U.S. Treasury and to the detriment of fair competition with domestic insurers.