Foreign Insurers Fight Proposals To Tax Offshore Activity

By Martin Vaughan
Dow Jones Newswire
May 1, 2009

WASHINGTON -(Dow Jones)- Foreign insurers are stepping up their fight against legislation that would tax offshore related-party transactions.

They will release a study Friday claiming that proposals in Congress would increase U.S. premiums across business lines by an average of 2%. That translates to an added $10 billion to $12 billion per year paid by Americans for insurance coverage, according to the analysis from the Brattle Group consulting firm.

The price increase would be higher for certain types of insurance that carry greater risk. Product liability insurance premiums could rise by as much as 6%, and earthquake insurance premiums by 5%, according to the study.

Particularly hard hit, the report says, would be business property owners in Florida, Louisiana and coastal areas where primary insurers are more likely to rely on reinsurance to spread risk.

The study was paid for by a coalition of foreign insurers fighting the legislation, including Bermuda-based reinsurers and some large European players, including Munich Re and Zurich Financial Services AG (ZURN.VX).

U.S.-based insurers, including W.R. Berkley Corp. (WRB) and Chubb Corp. (CB), have appealed to Congress to close what they say is a loophole that allows foreign insurers to avoid tax on U.S. business by shifting it to affiliates offshore.

Legislation from Rep. Richard Neal, D-Mass., targets the U.S. units of foreign insurers that write policies in the U.S. and then "cede" these premiums to offshore affiliates.

In an example of a reinsurance transaction, a U.S. subsidiary writes a $2,000 premium and cedes $1,000 to a Bermuda-based affiliate. The U.S. unit would receive $300 as a "ceding commission." But the net premium ceded of $700 could be deducted from taxable income in the U.S.

Reinsurance, even between related parties, is a common tool used by insurers to spread risk and to take advantage of efficiencies in management and administration.

But Neal and other critics in Congress say much of the offshore reinsurance is driven by the desire to dodge U.S. taxes. His bill would establish a benchmark based on an industry average of reinsurance with nonaffiliated companies, and tax all premiums that are transferred to offshore affiliates in excess of that threshold. Senate Finance Committee Chairman Max Baucus, D-Mont., is weighing a similar proposal.

"My bill would simply put an end to the unfair advantage these foreign entities have over American companies. There is a reason most of them have moved to Bermuda - and it's not for the tropical weather," Neal said.

Neal is expected to introduce a modified version of his bill shortly. Some insurance industry officials said they believe Neal will narrow the scope of the bill to carve out certain transactions involving reinsurance of third parties.

"We've urged them to narrow the scope. The target should be direct-written business that is then reinsured to an offshore affiliate," said William R. Berkley, chairman and chief executive of W.R. Berkley, in an interview.

The Brattle Group study said that 87% of all offshore affiliate reinsurance, or $23.9 billion of $27.4 billion, would be classified as "excess" under the Neal bill, and thus subject to the tax.

Rather than pay the taxes on those premiums, firms would replace some of the affiliate reinsurance with nonaffiliate reinsurance or capital, the firm found. But as much as $21.5 billion, or 20% of the reinsurance supply, would be lost, the study said.

"There is just not enough capacity in the U.S. market to reinsure all the risk we have," said J. David Cummins, a professor at Temple University's Fox School of Business and a co-author of the study. "We have so much property and so much exposure that we need to diversify globally."

But Berkley said the bill would not lead to a drop in overall availability of reinsurance. "All of these people have capital sitting in Bermuda - they're not going to stop doing business," he said. "This is a very competitive marketplace."

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