WASHINGTON—President Barack Obama's proposed fiscal 2012 budget has reignited a debate over the tax treatment of certain reinsurance transactions.

The Risk & Insurance Management Society Inc. and other organizations that also belong to the Washington-based Coalition for Competitive Insurance Rates wasted no time in sending a letter to congressional leaders last week, saying the proposal “essentially imposes an isolationist tariff on international insurance companies conducting business in the U.S.”

But a group of 13 domestic insurers that belong to the Coalition for a Domestic Insurance Industry say the move is necessary to prevent insurers from moving offshore.

Although the president's proposed budget does not go into detail, it holds that disallowing the tax deduction for excess nontaxed reinsurance premiums paid to affiliates would cut the federal deficit by more than $2.6 billion between 2012 and 2021.

The administration offered a similar proposal in its 2011 budget (BI, Feb. 1. 2010). Congress, however, did not take up the issue last year, and did not vote on a separate measure offered by Rep. Richard Neal, D-Mass., that resembled the administration approach.

“On its face, it certainly does appear to help the Neal bill,” said John R. Phelps, RIMS secretary and board liaison to the external affairs committee. “But the process is dynamic, so we're a long way from seeing that bill either enacted or deleted,” said Mr. Phelps, who also is director-business risk solutions at Blue Cross and Blue Shield of Florida Inc. in Jacksonville.

Mr. Phelps called the proposal “harmful to consumers. It's a matter of simple economics—if the use of foreign reinsurers is stifled, it reduces the number of possible risk transfer markets. This increases costs and is passed along to the individual and commercial consumers.”

“We're in some pretty tough economic times, and we should be focused on creating jobs by stimulating business and you don't do that by increasing their costs,” Mr. Phelps said.

“On the surface, there's no appetite for any tax,” said Eli Lehrer, vp in the Washington office of the Chicago-based Heartland Institute, also a member of the Coalition for Competitive Insurance Rates. But, he said “taxes like this one are the kind that are the easiest to slip in in the dead of night. The risk isn't that this will build mass support. Instead, it's just that it will be snuck by to patch a revenue hole and the budget right now is full of revenue holes.”

But a proponent of the change said it would benefit the economy.

“Fundamentally we've seen the deficit consistently increase and the need for revenue increase,” said William R. Berkley, chairman and CEO of Greenwich, Conn.-based W.R. Berkley Corp. and a spokesman for the Coalition for a Domestic Insurance Industry. “This particular loophole is a fairly straightforward issue,” and lawmakers of both parties support the change, he said.

“We point out that the reinsurance industry has largely migrated offshore and say, "If this loophole is not closed, the insurance industry will move offshore as well,'” Mr. Berkley said.

Such a tax would be “a win for everyone except the non-U.S.-domiciled reinsurers,” said Mr. Berkley, who said his group estimates that the change would raise between $17 billion and $20 billion over 10 years.

In one of the few other provisions dealing with property/casualty insurance, the proposed fiscal 2012 budget calls for changing part of the Homeland Security Act of 2002 that requires the Federal Aviation Administration to provide additional federal insurance coverage—hull loss, hull damage, and passenger and crew liability—to air carriers insured for third-party war risk liability.

“Now that commercial underwriters are expressing a stronger interest in writing a small but limited amount of war risk, the budget proposes to establish a $150 million deductible for hull and liability exposures in all FAA war risk policies,” according to the budget document. The goal, according to the proposal, is to encourage the commercial market to underwrite most aviation war risks.

The budget calls for the Justice Department to allocate $250 million over four years to “provide incentives for state medical malpractice reform,” but does not go into detail. It also calls for “a more aggressive effort to reform our medical malpractice system to reduce defensive medicine, promote patient safety and improve patient outcomes.”