WASHINGTON, April 12, 2013 /PRNewswire/ -- A proposal in President Barack Obama's FY 2014 budget would defer a tax deduction for reinsurance premiums paid to foreign affiliates by domestic insurers, thereby closing a tax loophole that costs the Treasury billions of dollars in tax revenues annually and provides foreign-based insurance groups a significant, unfair advantage over their U.S. competitors. Under the loophole, domestic insurance companies with foreign-based parents can escape U.S. tax on much of their underwriting and investment income derived from their U.S. business merely by reinsuring this business with a foreign affiliate in a low-tax or no-tax jurisdiction. This provides them an advantage over domestic groups in attracting capital for writing insurance to cover U.S.-based risks and erodes our tax base.
Opponents, including the so-called Coalition for Competitive Insurance Rates, are using scare tactics in a desperate attempt to block the legislation, claiming that it would cause reinsurers to restrict their capacity and increase prices. However, the proposal only affects reinsurance ceded to foreign affiliates - i.e. the transfer of income from one pocket to another within the same group. It expressly does not affect third-party reinsurance that enables America to manage volatile, catastrophic insurance risk -- those arrangements that add overall capacity to the market by shifting risk to unrelated parties. According to the LECG group, a respected global expert services and consulting firm, this fact alone causes opponents' claims regarding potential adverse effects on capacity and pricing to be completely untrue.
The LECG report concluded that it is highly unlikely that foreign groups would stop providing coverage in the U.S. market if they were required to pay tax like U.S. companies because prices are set by the competitive market. Even if they did, the rest of the market would quickly replace any capacity. In addition, since the proposal impacts only foreign-owned groups, they would be the only ones interested in raising prices to offset increased tax costs and it would be difficult for them to effectuate a price increase unilaterally, given their market share.