WASHINGTON—Legislation that would limit tax deductions for reinsurers that cede large portions of their U.S. premiums to offshore affiliates has been introduced in the House of Representatives and the Senate.

According to a joint statement issued Wednesday by the sponsors of H.R. 3157 and S. 1693—Rep. Richard Neal, D-Mass., and Sen. Robert Menendez, D-N.J., respectively—the change is necessary to ensure “that foreign-owned companies pay the same tax as American companies on their earnings from doing business here in the United States.” They claim that the change will reduce the federal deficit by about $12 billion over a decade.

Rep. Neal has introduced such legislation before, but it has not been brought to a vote. In addition, the Obama administration advocated disallowing the deduction for excess nontaxed reinsurance premiums as part of its budget proposal this year.

The issue has split the insurance industry.

The Coalition for a Domestic Insurance Industry would like to see the legislation incorporated in a deficit-reduction plan, said William R. Berkley, chairman and CEO of W.R. Berkley Corp., in a statement issued by the coalition, which represents 13 U.S. insurers.

“Congress never intended to give a preference to foreign-controlled insurers over domestic insurers,” said Mr. Berkley. “Closing unintended loopholes to recover lost revenue is one of the best ways to reduce the federal deficit. Doing so without hurting the pocketbooks of American taxpayers, while staunching the flow of capital overseas and restoring competitiveness for this important domestic industry, is a win for all."

But the Coalition for Competitive Insurance Rates, which includes insurers as well as the Risk & Insurance Management Society Inc., consumer groups and free-market advocates, denounced the move.

“The legislation would raise taxes on foreign-based insurance and reinsurance companies operating within the United States, driving up consumer insurance rates by reducing competition and critical U.S. insurance capacity,” said the group in a statement.

“Consumers in states like Florida rely on a global reinsurance market to protect their homes and businesses,” said Bill Newton, executive director of the Florida Consumer Action Network, in the statement. “Especially in these challenging economic times, we need to make sure that Americans can afford to conduct business and protect their families. Rep. Neal's legislation chooses to benefit a few large, profitable companies while putting average Americans at risk. Now is certainly not the time to make access to insurance more costly.”