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Mixed reaction to bills disallowing deductions for non-U.S. reinsurance

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Mixed reaction to bills disallowing deductions for non-U.S. reinsurance

The reintroduction of legislation that would alter the tax treatment of insurers that utilize foreign-domiciled reinsurance affiliates is drawing a mix of praise and condemnation from insurers and risk managers.

The bills, S. 991 and H.R. 2054, were introduced this week by Sen. Bob Menendez, D-N.J., and Rep. Richard Neal, D-Mass, respectively. They would disallow tax deductions for reinsurance premiums paid to affiliates based in any jurisdiction not subject to U.S. tax law.

The Coalition for a Domestic Insurance Industry, which represents 13 U.S.-based insurance groups — including Berkshire Hathaway Inc., The Chubb Corp., W.R. Berkley Corp. and Liberty Mutual Group Inc. — urged swift adoption of the proposed legislation.

“Congress never intended to give a preference to foreign-controlled insurers over their domestic competitors,” William R. Berkley, chairman and CEO of W.R. Berkley, said in a coalition statement. “Closing this loophole, staunching the flow of capital overseas and restoring competitiveness for this important domestic industry is a win for all.”

Opponents of the legislation include the Coalition for Competitive Insurance Rates, whose members include insurers such as Ace Ltd. and Zurich North America as well as the Risk & Insurance Management Society Inc.

“Engaging in offshore reinsurance programs is a legitimate practice that has proven over time to be an effective tool to keep insurance premiums low while providing countless organizations with the capacity to keep their assets safe,” Carolyn Snow, RIMS board liaison to the society's external affairs committee, said in a statement.

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“This short-sighted legislation fails to realize that if organizations are forced to abandon their offshore counterparts, the financial burden of catastrophic risks would fall on the government and policyholders — an alternative that could shatter this country's economic vitality,” Ms. Snow said.

Opponents of the legislation cited a 2010 study by Cambridge, Mass.-based consultancy the Brattle Group estimating that changes in tax law would reduce the net supply of reinsurance in the United States by 20% and increase the cost U.S. consumers pay for insurance by $11 billion to $13 billion annually.

Supporters of the bill pointed to a competing 2011 study by Emeryville, Calif.-based consultancy LECG Corp., which concluded that assertions about the legislation's potential adverse effects on capacity and pricing are untrue since foreign groups are unlikely to stop providing coverage in the U.S. market if they are required to pay higher taxes.

Similar legislation has been introduced multiple times since 2001 but has failed to pass either legislative chamber.

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