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Neal Bill could hamper insurance penetration: Study

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Neal Bill could hamper insurance penetration: Study

Lawmakers’ years-long attempts to close the so-called Bermuda tax loophole could cause hardship for U.S. businesses and consumers attempting to purchase insurance, a recently released study warns.


The Brattle Group, a Cambridge, Massachusetts-based consultancy, on Jan. 23 released a study that found the Neal Bill tax proposal would adversely affect U.S. business and homeowners, as they would likely encounter reduced availability and higher prices for property/casualty insurance for natural catastrophes and other infrequent but high-loss events.

“Our analyses show that the new proposals would lead to a degradation of the ability of firms to manage risk, both inside and outside the P&C industry,” Michael Cragg, Brattle’s principal and chairman, said in a statement. “It would widen the protection gap between insured and uninsured losses, which would result in the excess risk falling on the government, particularly for natural catastrophes and other high-loss events.”

Sen. Mark Warner, D-Va., and Rep. Richard Neal, D-Mass., introduced the legislation in September, although similar versions of the proposal have been around for several years. 

Currently, foreign insurance groups are allowed to shift their U.S. reserves into low- or no-tax jurisdictions overseas through related-party reinsurance transactions, allowing them to avoid U.S. tax on their investment income. Under the bill, the deduction for premiums paid to the offshore affiliate is deferred until the insured event occurs.

Since 1996, Sen. Warner’s office said, the amount of reinsurance sent to offshore affiliates has grown more than tenfold to nearly $42 billion in 2014 from a total of $4 billion ceded in 1996, over 90% of which went to Bermuda, Swiss and Cayman affiliates.

Sen. Warner said in a statement “the legislation will help stem the flight of capital and tax revenue abroad, and put all insurers on a level playing field.”

“By closing this loophole, we not only preserve our US tax base, we will stop an unfair competitive advantage for our U.S.-based companies,” Rep. Richard Neal said in statement.

Neither Sen. Warner’s nor Rep. Neal’s offices responded to further calls for comment on the Brattle Group report.

David Schenck, a New York-based principal with PricewaterhouseCoopers L.L.P. and the firm’s insurance and tax sector leader, said there could be any number of reasons for the bill’s failure to move forward since its introduction.

“Certainly the foreign insurers could make the argument about how it would upset the market by raising costs,” Mr. Schenck said, “and those costs will be passed back to consumers who are constituents. But I think it’s also a complicated area, and I think it’s also an area one might not deal with apart from a broader tax reform effort. It’s been a hard thing to just move forward on its own.”

The Brattle Group report also considers the House Republicans’ "Blueprint" for tax reform. Released on June 24, the blueprint proposes to reduce tax rates for businesses and for individuals and to move the U.S. tax system closer to a consumption-based tax system through reforms of the income tax rules.

The Brattle Group report noted that one of the blueprint’s provisions, known as border adjustability, “has the potential to subject reinsurance ceded and other forms of offshore risk transfer to a 20% import tax” — although the blueprint tax reform platform acknowledges that financial transactions may not be subject to the same taxation provisions.

“Assuming that this provision is applied to payments by offshore reinsurers,” the report said, “regardless of whether the reinsurers are affiliated or nonaffiliated with the U.S. insurers and whether the reinsurance is long- return or not, it would adversely affect the U.S. reinsurance market more significantly than the Warner/Neal Bill.”

“The impact of the border adjustment proposal is uncertain,” the report continued, “because it would place the industry in uncharted territory and the proposal lacks specific details.” 

 

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