Two very different pieces of legislation are gathering momentum in the United States. One would make life much easier for international reinsurers, while the other would make life so much more difficult, David Banks writes.
After years of lobbying, reinsurers serving the US market are witnessing moves towards a more level playing field. Insurance commissioners from states across the US are looking kindly on reinsurers and setting into motion a set of new laws which would allow for business to be conducted at once across all US states, removing the requirements to register separately and meet onerous collateral rules in each state. Ironically, another raft of legislation coming along at the same time would see offshore reinsurers’ transactions across the US taxed in order to create a fiscal burden equivalent to that felt by their onshore competitors.
Bradley Kading, Washington-based president of the Association of Bermuda Insurers and Reinsurers, is philosophical about the contrasting pieces of legislation. While the issue of common registration and collateral requirements appears to be gathering pace, Kading expects the biggest battle to be over taxation.
“This will be the third time in 20 years that a group of US insurers have called for tax on their foreign counterparts,” Kading says. “It will be a David versus Goliath battle, but, as my wife reminds me, David won that battle.”
OFFSHORE REINSURANCE TAX
US congressman Richard Neal, who is introducing the offshore reinsurance tax bill, is going down a well-trodden path. The well-respected Democrat from Massachusetts, who has been in office for 20 years, was a congressman on both previous occasions that US insurers have attempted to impose tax on their foreign rivals. Both times, the bill was thwarted when opponents were able to show the measure would raise the cost of insurance for the average American policyholder.
The difference this time is that they have chosen an influential, respected and experienced congressman who is chairman of the Subcommittee on Select Revenue Measures. Neal has become well known outside the US for his efforts to secure peace in Northern Ireland and is considered one of the top 100 most influential Irish Americans.
Like the previous attempts to pass an offshore reinsurance tax bill, this one comes around the time of a US election, where the expectation is that it can be relatively easy to secure public support for a tax that affects foreign firms – provided that the argument does not progress to the full effects for US householders. However, there is both cross-party support and cross-party opposition to the bill. Some of the members of congress will have changed by the time the bill goes through.
According to Neal, since 1996, the amount of reinsurance sent to offshore affiliates has grown dramatically, from a total of $4bn ceded in 1996 to $34bn in 2007, including $19bn alone to Bermuda affiliates. There has also been a steep rise in premiums written in the US by offshore entities, which have doubled in the last decade, representing $54bn in direct premiums written in 2006. Again, Bermuda-based companies represent the bulk of this growth, although Switzerland is also a favourable jurisdiction due to its network of tax treaties.
“These insurance profits are shuttled out of the US and then the investment income on those profits is also sheltered from US taxes. It is easy to see why foreign reinsurers, with such a tax benefit, enjoy a significant market advantage,” Neal says, using the term ‘tax avoidance’.
While measures are already in place under Section 845 of the US Tax Code to permit the Treasury to reallocate items and make adjustments in reinsurance transactions in order to prevent tax avoidance or evasion, Neal argues that thishas patently failed to stem the offshore tide.
“My colleagues may be thinking that this sounds similar to another provision
in the code, and they would be right. The tax code currently tries to limit the amount of earnings stripping – that is, sending US profits offshore through inflated interest deductions – by disallowing the interest deduction over a certain threshold,” Neal says.
However, opponents, including the ABIR, say it leads to higher prices in one of two ways.
“Firstly if you assume higher taxes, that is money taken out of the capital base of a company and there is a requirement on those companies to raise their prices. Secondly it would dissuade companies from participating in the US market, thus decreasing competitiveness and raising prices,” Kading says.
Kading expects the public debate to refocus on the impact on US policyholders towards the beginning of 2009. “The proposers of the bill say, ‘We are just taxing the foreigners, so there’s no harm’, but the real impact is on US consumers. Either way you look at it, it would mean a higher price paid by US consumers,” he says.
Legislators will have to consider the impact on commercial property companies in the US, as well as the effect on excess and surplus liability insurance. Furthermore, taxation of foreign reinsurers would affect hurricane and earthquake capacity.
Bermuda reinsurers have paid 66% of Texas wind pool reinsurance in the 2008 hurricane season, while Bermuda and European insurers combined paid more than 80%.
Meanwhile, a proposed new regulatory framework has been agreed by the Reinsurance Task Force of the National Association of Insurance Commissioners (NAIC) that includes collateral levels as low as 10% for well regulated non-US reinsurers.
Plans to cut collateral requirements for new policies written by international companies protecting US reinsurance risks will save billions of dollars and help provide better value cover for American businesses, the International Underwriting Association believes. The IUA, along with other industry bodies, has long campaigned against existing rules that require non-US reinsurers to post collateral of 100% of gross liabilities assumed for American cedants.
It is estimated that the current arrangements result in at least $50bn tied up in letters of credit, trust funds and other expensive financial instruments. Reducing the impact of collateralised funds for new risks will facilitate cross-border transactions and enhance competition within the US market, whilst still retaining adequate solvency protection.
The NAIC’s Reinsurance Task Force has agreed a framework which assigns ratings to individual companies according to their financial strength. Any collateral requirements are then based upon this rating. Top rated non-US reinsurers will only have to post collateral of 10% of gross liabilities.
The proposed framework also modernises the regulatory environment for US reinsurers allowing, for the first time, a single state licence to be recognised across all American states. The NIC framework anticipates that the Congress will be able to publish a new law allowing states to negotiate with foreign governments on the collateral required by foreign reinsurance companies.
Dave Matcham, chief executive of the IUA, said: “It is entirely correct that any collateral requirement must be based on a firm’s financial solvency, and not merely its geographical location. The NAIC’s Reinsurance Task Force has demonstrated outstanding leadership in adopting a more forwardlooking approach to reinsurance regulation. Its plan for change is in tune both with the global character of our industry and the methods adopted by other progressive regulators around the world.”
The proposed new regulatory framework goes to the full NAIC Committee for approval in December 2008.
David Banks is deputy editor of Global Reinsurance.
'Cruelty': the offshore reinsurance tax bill
House Bill number 6969 will start again when a new Congress is elected in November.
It will be the third time in 20 years that a group of US insurers have gone after their foreign competitors.
The first was in the early 1990s, the second was in 1999-2001. Both times it has been defeated because it has been shown to be increasing insurance costs. But will it be third time lucky for the lobbyists, who argue that non-US reinsurers have an unfair market advantage.