Michaela Koller fears US plans to limit deductions for certain reinsurance premiums could harm both the global and the US primary markets

CEA, the European reinsurance federation, believes proposals to place limits on the deductions for certain premiums ceded by US subsidiaries of non-US reinsurers to offshore affiliates would constitute a discriminatory tax on global reinsurers, harming both the global and US markets.

The proposal by the US Senate Finance Committee is based on a fundamental misunderstanding of the nature of reinsurance, of the importance of non-US reinsurance capacity to the US market and of levels of taxation in European countries.

Reinsurance is used by insurers for sound business reasons – to manage risk and diversification and to create additional capacity – not to avoid tax. The US market needs a large amount of reinsurance capacity, and large portions of high-risk business is supplied by European companies who therefore also pay significant amounts of US claims.

About half of all claims resulting from Hurricane Katrina, for example, were paid by non-US reinsurers. A change in affiliated reinsurance tax for overseas affiliates would reduce reinsurance, increase the cost of insurance for US consumers and distort competition in the US market.

The aim of the Senate proposal seems to be to prevent income shifting to low or no-tax jurisdictions, yet the average tax burden in Europe is about 25% and thus comparable to US corporate tax rates.

Limiting the deductibility of insurance premiums paid to European affiliates would also violate the provisions of double tax treaties signed by the US with several European countries.

Michaela Koller is director general of CEA.