Two national coalitions have squared off in a debate over the perceived tax advantages enjoyed by alien insurance carriers in the US and their off-shore reinsurer siblings. It’s the Coalition for a Domestic Insurance Industry versus the Coalition for Competitive Insurance Rates battling over the government’s most recent attempt to change the tax code created in 1986 to impose tighter regulations on alien-owned insurance carriers and their related reinsurers (similar legislation was proposed in 2001 and 2007).
Representative Richard Neal (D – Mass.) introduced H.R. 6969 on September 18, 2008, in an attempt to alter the tax code and close what is described as a loophole allowing alien insurance carriers operating in the US to cede much of their reinsurance to off-shore siblings not encumbered by the US tax code. Currently, US-based affiliates of foreign-based insurers are allowed to place reinsurance with the affiliated alien carrier and can avoid paying taxes on the amount of the reinsurance premium.
This is unfair according to the Coalition for a Domestic Insurance Industry, which is made up of 14 US-based insurance companies*. William R. Berkley, chairman and CEO of W.R. Berkley and spokesman for the coalition told the House Ways and Means Committee (where the bill sits now) that US-based insurers don’t have this opportunity and thus are taxed on all their underwriting and investment income creating an uneven playing field.
(*Members are: W.R. Berkley Corporation; AMBAC Financial Group, Inc; American Financial Group, Inc; Berkshire Hathaway; The Chubb Corporation; EMC Insurance Companies; The Hartford Financial Services Group, Inc; Liberty Mutual; Markel Insurance Company; MBIA Insurance Corporation; Safeco Corporation; Scottsdale Insurance Company (a Nationwide subsidiary); The Travelers Companies, Inc; and Zenith Insurance Company)
Entrenched on the other side of the battle field, the Coalition for Competitive Insurance Rates* states that such legislation would be bad for consumers. In a joint press release, the Association of Bermuda Insurers and the Organization for International Investment, two members of the coalition, quote Bradley L. Kading, President of the Association of Bermuda Insurers and Reinsurers (ABIR) as saying, “This bill is an isolationist effort by a handful of very large, very profitable U.S. insurance corporations who intend to create a new barrier for their competitors so that they will benefit from a protected market. This proposal could not come at a worse time for the U.S. economy. Higher prices for consumers are the likely outcome.”
(*Members of the Coalition for Competitive Insurance Rates include the Risk and Insurance Management Society (RIMS); the Florida Consumer Action Network; the National Risk Retention Association; the Association of Bermuda Insurers; and the Organization for International Investment)
The release also quotes Scott Richardson, the South Carolina Insurance Director, “Without a competitive global reinsurance market, it would be even more difficult and expensive for South Carolina and other coastal state home and business owners to obtain insurance to protect them from hurricanes.” In the wake of Gustav and Ike, this is a sobering thought.
Reportedly, Richardson is not the only insurance director or commissioner to come out against the proposed legislation.
Currently off-shore insurance carriers account for 10.9 percent of the US insurance market. The proposed legislation is intended to slow the growth or reduce the market share held by international markets; but is such insurance isolationism good for the US insurance industry and ultimately the consumer?
Following are just a few thoughts and opinions regarding such limitation on foreign insurers and the current legislation of US insurers:
• Capacity increases and premiums decrease as a result of the capital pumped in by alien insurers and reinsurers. On the other hand, the hard market would return much quicker and with more fervor if such legislation is passed.
• One argument put forth for Federal regulation of insurance is so that the US can compete on a more level playing field internationally. This legislation would potentially kill the argument for such regulation since the US will become insurance isolationists imposing a tariff of sorts on off-shore carriers (which would potentially result in quid pro quo).
• With the shaky ground under the domestic insurance industry currently, should the US look to limit the availability of markets and capital?
• Insurance carriers that support this legislation do so because they say the current structure is bad for the domestic insurance companies. The coalition fighting this legislation is doing so because they feel the outcome would be bad for the insurance-buying public (the client). Who can handle it better?
• US insurers are subject to “windfall” profit rules in some states. Rather than limiting how much an insurance carrier can make, direct how the profits are used/invested. If a carrier has a very profitable year, require some percentage to be put back into the market, not given back as a rebate. As domestic capacity increases, the need to go off shore decreases. A “windfall” profit penalty is counterintuitive; more profit equals more ability to take risk, reduced premiums in the future and less need for Federal regulation of any kind.
On September 23, 2008, the American Insurance Association (AIA) testified before the US International Trade Commission regarding the issues and problems created by US barriers to global insurance. Click here to link to the testimony.
As of October 3, 2008, the National Association of Insurance Commissioners (NAIC) has not taken a position on this bill. In a statement made to Insurance Journal and MyNewMarkets.com, the NAIC states that, “The bill’s progress will continue to be monitored, but to speculate on any future official position would be premature.”