WASHINGTON—Opponents and proponents testified before a U.S. House subcommittee last week on a controversial tax proposal that would target offshore reinsurance transactions.

Testifying during a House subcommittee hearing, executives of Chubb Corp. and W.R. Berkley Corp. argued that the current system creates an unlevel playing field, while opponents said the bill would increase insurance costs, particularly in catastrophe-prone areas.

The bill, H.R. 3424, introduced by Rep. Richard E. Neal, D-Mass., seeks to limit tax deductions for reinsurers that cede large portions of their U.S. premiums to offshore affiliates. Under the current system, U.S. affiliates of a foreign-based company can avoid paying U.S. tax on domestic underwriting and investment income by reinsuring their business offshore, according to the proposal.

Rep. Neal, chairman of the Select Revenue Measures subcommittee of the House Ways and Means committee, said “there has been significant growth in U.S. premiums sent offshore for reinsurance, but particularly so for those sent to related parties.”

The problem has grown worse after a “decade of migration offshore,” said Rep. Neal, who introduced a similar measure in 2008 on which Congress took no action.

The bill is backed by the Coalition for a Domestic Insurance Industry, a group of 14 U.S.-based insurers. Testifying on behalf of the coalition were John J. Degnan, vice chairman and chief operating officer of Warren, N.J.-based Chubb Corp., and William R. Berkley, chairman and CEO of Greenwich, Conn.-based W.R. Berkley Corp. Both said the issue is a question of fair taxation.

Opponents, who view the tax as punitive and argued that any such measure would dramatically constrict capacity and increase rates, include the New York-based Risk & Insurance Management Society Inc. and the Washington-based Coalition for Competitive Insurance Rates. The organizations reiterated their opposition to the bill last week in statements.

Messrs. Degnan and Berkley argued that the measure would not hurt the availability or cost of insurance. Mr. Berkley said insurance companies decide how much to charge customers based on competition rather than cost.

“Nothing about this legislation should affect either pricing or capacity,” Mr. Berkley said.

However, a Florida official told the subcommittee the plan would result in higher insurance costs for consumers, citing a recent Brattle Group Inc. study. The Cambridge, Mass.-based economic and financial consulting firm projects that Rep. Neal's plan would cost U.S. consumers $10 billion to $12 billion more per year to obtain the same coverage, as reinsurers would pass on the cost of their less-favorable tax treatment.

“International insurers and reinsurers are indispensable for high-risk states such as Florida,” said Sean M. Shaw, Florida's insurance consumer advocate. Mr. Shaw, the only witness who testified in opposition to the bill, said there was “widespread” opposition to the proposals in the U.S. Gulf Coast states.

Another opponent emerged when Rep. Kendrick Meek, D-Fla., said he “strongly opposed” the measure because “Florida residents are already on their knees” in trying to cope with insurance premiums.

In addition, Rep. Meek told the subcommittee that the entire Florida congressional delegation is “solid” in its opposition to this bill.

Without a co-sponsor, observers say the bill is not likely to succeed as a stand-alone measure. However, they also say it could pass as a revenue raiser on another piece of legislation.

Bradley Kading, president and executive director of the Assn. of Bermuda Insurers & Reinsurers, which also opposes the bill, said the threat “remains very real.”

The Obama administration put forth a similar but less far-reaching provision in its fiscal year 2011 budget in February. One key difference between the proposals is the benchmark to defining excessive reinsurance.

The administration plan uses a 50% threshold while the Neal bill would use an industry average.

The key issue for the administration is that “we view it as an anti-abuse proposal,” said Stephen Shay, deputy assistant treasury secretary for international tax affairs.