US House Digs Into Offshore Reinsurance Tax, Putting Foreign and US Firms at Odds

In a congressional hearing on closing what some call an offshore reinsurance taxation loophole, opponents of changing the system focused on how consumers might be harmed in places with already shaky insurance markets. Meanwhile, the idea's supporters accused foreign companies of trying to maintain an unfair tax advantage and using scare tactics to mislead the public.

The hearing in the House Ways and Means Committee revolved around a bill, HR 3424, that would deny certain tax deductions to foreign-based companies moving premiums offshore to lower-tax jurisdictions. A similar idea also emerged in the White House's budget proposal. While the issue had been examined in a Senate hearing a few years ago, this marks the first time the House has held a hearing.

William R. Berkley, chairman and chief executive officer of the W.R. Berkley Corp., has been the chief supporter of the tax change, which he said would counter foreign insurers' attempt to "maximize their ability to pay the least possible taxes. That's what this is about. ... They have billions of dollars a year at stake in trying to confuse the issue." Berkeley added the implication of a tax advantage for the foreign companies can become major. "It's already effectively moved the reinsurance business from this country," he said. "If we don't act, we will find ourselves without a domestic insurance industry."

John J. Degnan, vice chairman and chief operating officer of Chubb Corp., called the current tax situation a "unique unfairness" that establishes an inequality. "We don't want to leave the United States," he said. "We have no intention of doing so now. But the pressure is growing."

"I think that there is not a clear acknowledgement of the contribution that foreign insurers and reinsurers make to the U.S. market," Alex Kaplan, a vice president for regulatory affairs at Swiss Re, said after the hearing. He says the public doesn't often consider this wholesale area of global insurance and America's reliance on it, and he thinks the lawmakers will take some more time to study the issue. "I think there's going to be an acknowledgement that we should not do anything ... that scares away foreign capacity."

The result of this proposal would be " to force these companies to trap their risk in one location," Kaplan argued.

A foreign-owned company reinsuring with one of its offshore affiliates can find "a significant reduction in the overall U.S. taxation," according to testimony from Stephen E. Shay, deputy assistant secretary for international tax affairs at the U.S. Department of the Treasury, though he added that the foreign affiliation may be subject to a 1% excise tax. "The administration believes that it is important to level the playing field between U.S.-owned and foreign-owned insurance companies," he said.

However, the Coalition for Competitive Insurance Rates, a group of companies opposed to the bill, has been pointing to a study it commissioned by the Brattle Group, estimating that the 10-year cost to consumers could be an increase of $110 billion to $130 billion in insurance premiums. "Even under our best-case scenario, the legislation would eliminate almost all (87.2 %) of the offshore affiliate reinsurance," the report said, adding further data about it increasing insurance costs in states like Florida.

One questioner wanted to know how a $17 billion tax change could turn into a $130 billion cost for consumers, and Berkley argued it "failed any test of logic." But Kaplan later explained that if reinsurers are squeezed "there is going to be a multiplier economic effect on the total amount of insurance available. And as a result, prices offered by the direct writers will go up."

The legislation to change the tax code has been introduced repeatedly by Rep. Richard Neal, D-Mass., the chairman of the Select Revenue Measures Subcommittee that called the hearing. He said during the hearing that the issue amounts to "sophisticated tax avoidance" with "companies moving offshore for the purpose of avoiding American taxes." "This is not simply a revenue grab," he said in response to Republicans accusing the Obama administration of trying to find new revenue.