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Mark A. Hofmann

Tax proposal for offshore reinsurance premiums comes under fire

March 4, 2014 - 3:18pm



The Obama administration's proposal that would deny a tax deduction for certain reinsurance premiums paid to foreign-based affiliates by domestic insurers is coming under the fire from a broad range of groups, including the Risk & Insurance Management Society Inc.

The proposal is contained in the administration's proposed budget for fiscal year 2015, released Tuesday. The administration's general explanation of the budget provisions says the proposal would “deny an insurance company a deduction for premiums and other amounts paid to affiliated foreign companies with respect to reinsurance of property and casualty risks to the extent that the foreign reinsurer (or its parent company) is not subject to U.S. income tax with respect to the premiums received,” and that it would “exclude from the insurance company's income (in the same proportion in which the premium deduction was denied) any return premiums, ceding commissions, reinsurance recovered, or other amounts received with respect to reinsurance policies for which a premium deduction is wholly or partially denied.”

The administration says the change is necessary because “reinsurance transactions with affiliates that are not subject to U.S. federal income tax on insurance income can result in substantial U.S. tax advantages over similar transactions with entities that are subject to tax in the United States.”

Limited reinsurance supply feared

The Washington-based Coalition for Competitive Insurance Rates, of which RIMS is a member, quickly condemned the proposal.

“Instituting this tax would significantly reduce the supply of reinsurance in the United States and decrease America's ability to manage volatile, catastrophic insurance risk,” said RIMS President Carolyn Snow in a statement issued by the coalition. “These proposals are isolationist measures aimed at benefiting some competitors in the market at the expense of others.”

“The president's proposed tax on foreign affiliate reinsurance would only serve to limit U.S. insurance capacity and drive up the cost of insurance — a major threat to homeowners and small businesses, particularly those in disaster-prone states such as Louisiana,” said Louisiana Insurance Commissioner James Donelon in the statement.

“This proposal violates the fundamental principle that, in a free and open society, similar parties and similar transactions should be treated equitably, regardless of where a person is from or where a company is headquartered,” said R Street Institute Senior Fellow R.J. Lehmann in a separate statement.

The idea of changing the tax deductibility of such reinsurance transactions has been floated before, most recently in a tax reform proposal issued by House Ways and Means Committee Chairman Dave Camp, R-Mich., last week.

The administration proposed a change in the tax treatment of affiliated reinsurance transactions in its budget proposal last year.

Rep. Richard Neal, D-Mass., has introduced legislation to eliminate the tax deduction, but neither chamber of Congress has ever approved legislation that would make such a change.

 



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