US president Barack Obama is relentless in his bid to stop business revenues disappearing into foreign jurisdictions. When regulation change is touted in the USA, all insurers and reinsurers must take notice, David Banks writes.
The election of Barack Obama as US president was celebrated as widely in Bermuda as it was among Democratic campaigners in the USA. Yet there were also those who were quick to point out that the new president’s track record on offshore financial legislation might not be such good news for the domicile.
President Obama has for a long time been keen to stem the flow of business revenues to foreign jurisdictions and to bring their tax dollars to the US treasury. As a senator, he was one of the three proposers of the Levin Bill in 2007, which sought to “stamp out offshore tax evasion” by companies and individuals.
On the election campaign and in interviews since, Obama has expressed outrage that thousands of firms operating in the USA are avoiding tax by having a token presence in such offshore domains as the Cayman Islands. In one election campaign advert, he mocked opponent John McCain for taking “more than just a vacation” in Bermuda, where McCain pledged support for companies that “benefit from tax breaks”.
Such messages were music to the ears of the Coalition for a Domestic Insurance Industry, a group of 13 US companies including Warren Buffett’s Berkshire Hathaway, that has been pressing for new taxes on foreign competitors in order to create a “level playing field”.
The Neal Bill sought to do just that, by imposing a special punitive tax on foreign-based companies providing reinsurance to US affiliates. While that bill was not picked up, Obama’s February budget includes a proposal to deny a tax deduction for certain reinsurance premiums paid to foreign-based affiliates.
But, as the Association of Bermuda Insurers and Reinsurers (ABIR)’s Bradley Kading is quick to point out, this proposed legislation is not just a problem for Bermuda or offshore financial centres.
“There’s an incorrect view in Bermuda that they have been singled out. It views the US political rhetoric as hostile but that is not the case. These proposals affect all businesses whether foreign or domestic,” he says.
He says 15 European governments have expressed concern over what they regard as ‘protectionist’ efforts to impede international insurers. The UK, Germany and Switzerland have written to Obama, alluding to specific trade and treaty violations that might be jeopardised by an effort to impose tax on foreign insurers.
As the largest market in the world, regulatory change in the USA affects insurers and reinsurers internationally. A significant proportion of peak peril insurance is covered by foreign reinsurers. For example, 64% of the insured cost of the 9/11 attacks was picked up by foreign insurers and reinsurers, according to a report by Dowling & Partners.
The Lloyd’s market alone writes more than $12bn of premium in the USA and is the second-largest surplus lines insurer in the US market.
Back in the USA, several state regulators have expressed opposition to the affiliated reinsurance plans in Obama’s budget proposals, and consumer groups are also “disappointed”, saying the measures would ultimately inflict policyholders with higher premiums.
“US consumers, whether they know it or not, rely on the international insurance market to protect their homes and businesses,” Florida Consumer Action Network’s executive director,
Bill Newton, says. “Given today’s economic conditions, now is certainly not the time to make access to insurance more costly.”
The president’s requirement for new tax revenues and the industry’s desire for more efficient supervision have created a perfect storm for new legislation. Add to this the feeling within a section of the political elite that insurance should be controlled more closely in the wake of the AIG debacle, and it is easy to see why there has hardly been a busier year for new insurance regulation than 2010.
AM Best assistant vice-president Jeff Mango says: “We have heard people say that what we are experiencing is ‘the new normal’ and I would tend to agree with that. The Federal Reserve is more involved now in the financial markets and, with myriad insurance regulation being drafted, it is certainly a new landscape for domestics and multinationals.”
Filling the gap
It is understandable that any US president would attempt to raise tax revenues at a time of national need. But the Risk and Insurance Management Society (RIMS) believes the cost would ultimately fall on the policyholder and that tax revenues would be small compared to the total required; the estimated amount raised would be just $500m over 10 years, less than half the $122bn needed.
“Including the provision in the full-year 2011 budget will not significantly reduce the deficit,” Competitive Enterprise Institute senior fellow Eli Lehrer says. “We must do all that we can to revitalise the nation’s economy; foreign-based reinsurers serve as an irreplaceable safety net for the consumers and businesses that are driving that effort.”
Kading says the budget plans are an example of a failure to understand insurance risk management. “Affiliated reinsurance helps to manage volatile, potentially large-loss, catastrophic insurance risk. But it is somewhat heartening that the administration did not endorse the Neal Bill’s provisions on affiliated reinsurance, which have been advocated by a small group of US insurers advancing their protectionist interests.”
Kading warns, however, that the affiliated reinsurance proposals in the February budget make up just four lines of text. The final legislation will be drafted by Congress and might start to resemble the Neal Bill once again.
The Coalition for Competitive Insurance Rates, of which Kading’s ABIR is a member, has generated substantial opposition to the proposals to squeeze foreign reinsurers.
The CCIR is currently speaking to individual US senators in the hope of influencing the wording of the legislation before the mid-April deadline for Congress to create a budget resolution. Some senators are concerned about international trade commitments, while others are concerned about insurance capacity and pricing for the peak peril markets, such as hurricane, earthquake and terrorism cover in Florida, California and New York.
A study by financial research agency The Brattle Group estimated that the effect of taxing foreign reinsurers would decrease reinsurance supply to the USA by 20% and would increase consumer prices by $10bn-$15bn annually.
But the CCIR’s battle could become more difficult if the affiliate reinsurance proposal is picked up as a ‘floor amendment’ on a bill that needs revenue.
Whatever is decided in the USA, it is not just Bermuda that will have to pay attention. The landscape is changing for domestic and multinational reinsurers the world over. GR
Terror protection cutbacks
Obama’s February budget proposals also include a reduction of $250m in state reinsurance protection provided to US insurers through the Terrorism Risk Insurance Programme Reauthorisation Act (TRIPRA – originally set up in 2002 as the Terrorism Risk Insurance Act). As it is currently structured, TRIPRA provides a $100bn backstop to property and casualty insurers for losses arising from foreign or domestic terrorist acts.
RIMS secretary and RIMS external affairs committee director, Scott Clark, believes the proposed change contradicts the government’s projected commitment to terrorism insurance. “The administration’s proposal to eliminate $250m from terrorism risk financing is regrettable and disappointing from the consumer perspective. This decision represents an inherent conflict in policy goals.
“The proposed budget reduces the government’s commitment to ensuring a stable market for terrorism insurance, while restricting one of the primary means the industry has to manage its terrorism risk through reinsurance.”
As well as potentially affecting pricing for primary insurance, the budget measures on reinsurance could have a secondary effect by altering financial ratings for some primary insurers across the USA.
AM Best’s Ray Thompson says affiliated reinsurance, TRIPRA and cat funds are all relevant to rating agencies and could change rating outlooks. “We have to ask whether we can give insurers ample credit when there is such uncertainty as to whether they can raise capital,” Thompson says. “All of these issues would pose the question of whether insurers can get adequate reinsurance backing.”
A Federal Office of Insurance?
In other insurance legislation, there are efforts to streamline the regulation of non-admitted insurance and reinsurance in a bill currently known as HR 2571.
The proposals, which have been driven by large national insurers and the National Association of Insurance Commissioners (NAIC), could benefit an outside company, a global company or even a domestic company that is doing business in all 50 states.
The bill has been passed by the House of Representatives and must now go to the Senate.
Included in the NAIC’s proposals are rules that would mean an insurer would only need to hold collateral in one state while doing business in another.
The NAIC suggests creating a National Insurance Supervisory Commission to co-ordinate such interstate insurance, whose main powers would be in insurance research and information sharing, rather than regulation.
The proposals have been controversial, however, and are opposed by the National Conference of Insurance Legislators (NCOIL), which is set to meet in March to discuss fears that their individual state powers could be undermined by what would in effect be a federal office of insurance.
NCOIL’s director of state-federal relations, Mike Humphreys, says that such an office could be an “immediate first step” towards an optional federal insurance charter.
The NAIC is itself wary of creating a federal insurance charter and a new regulatory regime that would diminish or supplant state-based consumer protections. A federal body could also be swept up in government efforts to regulate financial services as a whole, rather than regulate insurance separately.