WASHINGTON—A coalition of insurance industry groups and other organizations, including the Risk & Insurance Management Society Inc., criticizes an Obama administration budget proposal that would disallow the deduction for excess nontaxed reinsurance premiums paid to affiliates.

In a letter sent Monday to congressional leaders, the Washington-based Coalition for Competitive Insurance Rates said the proposal “essentially imposes an isolationist tariff on international insurance companies conducting business in the U.S.”

“The administration’s decision to target this vital part of our insurance infrastructure is misguided,” John Phelps, director, business risk solutions at Blue Cross and Blue Shield of Florida Inc. and RIMS’ board liaison-external affairs committee, said in a statement announcing the groups’ concerns.

“Instituting this tax would significantly reduce America’s ability to manage volatile, catastrophic insurance risk, whether it involves natural disasters like hurricanes or manmade ones like terrorist attacks,” Mr. Phelps said in the statement.

Although the budget does not provide any further detail, the document says such a change would cut the federal deficit by more than $2.6 billion between 2012 and 2021.

The administration made a similar proposal in last year’s budget, but Congress did not take up the issue. The budget proposal resembles provisions of a bill introduced in the last Congress by Rep. Richard Neal, D-Mass.

In one of the few other provisions dealing with property/casualty insurance, the proposed fiscal 2012 budget calls for changing a provision in the Homeland Security Act of 2002 that requires the Federal Aviation Administration to provide additional federal insurance coverage—hull loss or damage and passenger and crew liability—to air carriers insured for third-party war risk liability.

“Now that commercial underwriters are expressing a stronger interest in writing a small but limited amount of war risk, the budget proposes to establish a $150 million deductible for hull and liability exposures in all FAA war risk policies,” according to the budget document.

“The administration’s goal is to incentivize the commercial marketplace to underwrite most but not all aviation war risks,” according to the budget document.