Risk managers and members of the insurance industry are gearing up for another legislative battle over an effort to eliminate tax deductions for certain reinsurance transactions.
The latest salvo came last month when the Senate Finance Committee released a discussion draft of tax reform legislation that no longer would allow U.S. subsidiaries to deduct the cost of reinsurance that is ceded to affiliates that are not subject to U.S. taxes.
This is similar to legislation introduced earlier this year in the House of Representatives and the Senate by Rep. Richard Neal, D-Mass., and Sen. Robert Menendez, D-N.J., respectively, but never brought to a vote. The Obama administration also has backed the idea of changing the tax treatment of what is known as affiliated reinsurance.
The issue has divided the property/casualty insurance industry.
Thirteen U.S.-based insurers formed the Coalition for a Domestic Insurance Industry several years ago to push for the changes. However, other insurers, joined by the Risk & Insurance Management Society Inc., state lawmakers and free market-oriented groups, formed the Coalition for Competitive Insurance Rates to oppose the changes.
William R. Berkley, chairman and CEO of Greenwich, Conn.-based W.R. Berkley Corp., has spearheaded efforts to change the tax treatment of affiliated reinsurance.
“It's in Obama's budget; you have Neal and Menendez who are both supporters,” said Mr. Berkley. In the past four and a half years “I have called on probably 100 congressmen and senators and almost all of them have been supportive. Most of them who weren't supportive really didn't understand the economics of the marketplace.”
“Once you explain the economics of the issues, they realize this really wouldn't change the available market for any kind of insurance,” Mr. Berkley said. “How much taxes you pay doesn't make you do business or not do business. Once you're in the biz, you want to do as much business at a profit that you can do. Frankly, at the moment, there's more capacity especially to do catastrophe reinsurance than the market can use.”
The Obama administration has estimated that the change would raise about $6.2 billion over a 10-year period.
However, the Washington-based R Street Institute, a member of the Coalition for Competitive Insurance Rates, does not buy that argument.
“The primary issue is it clearly will raise the cost of catastrophe insurance,” said Ray Lehmann, a senior fellow at the free-market group. “We have an opportunity to take advantage of low reinsurance costs around the world right now and why we would want to raise those costs is not apparent. If you wanted to tax all intercompany reinsurance cessions, then you'd have lot of U.S companies that would have a pretty heavy burden including Mr. Berkley's. This is clearly treating foreign-based companies as different from American companies. That fits my definition of protectionism.”
RIMS also opposes the proposal.
“This is not an area where the government should look to increase tax revenue,” Carolyn Snow, a member of RIMS' board, said in a statement. “Penalizing reinsurers would place a significant burden on U.S. businesses and the public. The ripple effect of this decrease in capacity for acts of terrorism, natural disasters and other risks would force many to forgo new business opportunities and investments — a predicament that could significantly stunt the global economy.”
A 2010 study by the Cambridge Mass.-based Brattle Group, the most recent detailed study available, estimated that the Neal bill would reduce reinsurance capacity by about 20% and cost policyholders as much as $11 billion. The study was commissioned by the Coalition for Competitive Insurance Rates.
But Mr. Berkley questioned how much risk managers gain under the current tax structure.
“The problem is the people who are supportive of the status quo not changing is it gives them a competitive advantage,” he said. “They give risk managers a one-sided picture that you'll have to pay more. This is a very competitive business. They're keeping bigger profits. They're giving no benefit to the insured.”
Mr. Berkley said without the change, the domestic insurance industry might redomicile.
“You make all the money offshore and you get to pay no tax on the U.S. business,” he said. “Eventually, all the U.S insurance companies will move offshore because they have to.”
The legislation to date has only its primary sponsors and no Republican support.