The elephantine battle between US insurance companies wanting to close the ‘Bermuda loophole’ and reinsurers fearing an unfair tax could drastically affect the American consumer

Industry resistance to Bill HR 3424 – otherwise known as the Neal Bill – has been heating up, with voices of dissent now coming from Europe. In July, the German ambassador to the USA, Klaus Scharioth, joined the European insurance and reinsurance federation, the CEA, in expressing concerns surrounding the proposals to change the US tax treatment of reinsurance between affiliated entities.

Both argued that the bill, introduced in the US House of Representatives on 30 July 2009, would be in violation of US obligations to avoid protectionism if it is passed. “It goes without saying that the German government recognises the US government’s right to combat tax avoidance and evasion,” wrote Scharioth. “But it is our view that the proposed legislation goes well beyond this objective and, as a result, will be in conflict with provisions of the German-US tax treaty.”

The US Committee on Ways and Means’ select revenue measures subcommittee chairman Richard E Neal introduced the bill to put an end to the ‘Bermuda loophole’. This is the migration of premiums from US (re)insurers to their offshore affiliates in order to “avoid tax, and gain a competitive advantage over American companies”, said Neal.

Groups representing European reinsurance companies are concerned that the US effort to target so-called tax havens will result in the unfair levy with an additional tax charge. “EU reinsurers face an average tax burden of 25%, so the argument that the existing tax deduction could create incentives to reinsure more than would otherwise occur between unrelated entities does not hold true,” said CEA president Tommy Persson. “The proposals would also lead to taxation in both the USA and the reinsurer’s country of origin, thereby violating US double tax treaties.”

This will ultimately harm the US consumer, warn opponents of the bill, as it will lead to a contraction of insurance capacity with prices going up by as much as $10bn-$12bn a year, according to the Risk and Insurance Management Society.

Since the proposals are only applicable to foreign and not US reinsurers, the CEA also suggests that they could contravene the US G-20 commitment to avoid protectionism and its World Trade Organization commitments under the General Agreement on Trade in Services. “We strongly urge US legislators to recognise the detrimental effects on US consumers and the US insurance market, and to abandon the proposals,” Persson concluded.

Foreign reinsurance companies argue that they provide an important economic role by underwriting US peak catastrophe risks. A number of companies, including Swiss Re, Munich Re, Allianz, XL, Argo, Arch and Zurich, have voiced their opposition to the bill.

Foreign-controlled insurers and reinsurers, with almost 500 US-based subsidiaries, provide 15% of the direct insurance – and more than half of the reinsurance – accepted in the USA, the CEA points out. In 2008 they also paid nearly twice as much in claims settlements to US cedants as they received from them in premiums. Total US premium ceded to non-US reinsurers was $58.2bn, while net recoverable amounted to $121.2bn, according to data from the Reinsurance Association of America.

The Bermuda reinsurance market, which has been beleaguered since President Obama came to power, is also keen to stress its risk transfer role. Bermuda’s reinsurance sector paid out $17bn in property claims in 2005, representing 25% of total damages after the USA was battered by hurricanes Katrina, Rita and Wilma, according to Analysis of the US Economic Impact of Bermuda based Insurers and Reinsurers, a report from the Association of Bermuda Insurers and Reinsurers.

“Bermuda insurers and reinsurers lead the market for coverage from hurricanes and earthquakes,” said the report. “These innovative providers account for as much as 40% of the US market. This study has found that as many as four out of 10 homes and businesses rely on Bermuda firms for their insurance protection, a major economic contribution that may be overlooked, as reinsurers stand behind the primary insurers.”

To date, more than 100 independent groups have written letters expressing concerns about the bill. On 14 July, the select revenue measures subcommittee held a hearing on the taxation of reinsurance between affiliated entities, at which the Florida insurance consumer advocate, Sean M Shaw, registered his opposition to HR 3424.

“My job is to advocate for Florida insurance consumers,” he said. “There is a proverb that says, ‘When elephants fight, the grass gets trampled.’ This issue has been presented as a battle between some US insurance companies, on one side, and the international reinsurers, on the other side.

“Frankly, I don’t care about the elephants, on either side,” he said. “I’m concerned about American consumers. Consumers can expect to pay an additional $11bn to $13bn every year because of this tax increase. That would be a bad idea even in the best of times. And it is a terrible idea now. Especially in hard times, international insurers and reinsurers are indispensable for high-risk states such as Florida and for a heavily populated, highly industrialised, and increasingly vulnerable, nation such as the United States.” GR