Best Sees Minimal Rating Impact from Tax Changes on Reinsurance

A.M. Best has weighed into the ongoing debate over whether or not the ability of “foreign” reinsurers to avoid significant amounts of U.S. taxes by transferring reinsurance premiums paid to foreign affiliates by domestic insurers.

In a proposed budget, released in 2013, President Obama included a proposal to end some of these alleged tax benefits enjoyed by most international (re)insurers doing business in the country.

The debate has been going on for at least the last 10 years. In 2010 Rep. Richard Neal (D-MA), reintroduced legislation to tax foreign-based insurers and reinsurers. The proposal died then, but has now been resurrected. The proponents, led by the Coalition for a Domestic Insurance Industry (CDII), which is supported by domestic insurers, including William R. Berkley, Chairman and CEO of W. R. Berkley Corporation.

On the opposing side stands the Association of Bermuda Insurers and Reinsurers (ABIR), led by Bradley Kading, its president and executive director, and an additional organization, the Coalition for Competitive Insurance Rates (CCIR). They have been making the same points in opposition to similar measures that have surfaced in four of the last five Obama budgets.

In Best’s analysis, “although this issue warrants ongoing surveillance,” Best said it doesn’t “believe it will lead to rating revisions over the near term. Depending on the final outcome, companies likely will seek operating alternatives to ensure capital efficiency if, and when, the tax benefits for non-U.S. companies are eliminated.

The opposition forces – basically a who’s who of Bermuda’s re/insurance companies – have also been busy persuading a number of legislators that if the tax benefits are eliminated states that are particularly exposed to natural catastrophes, will be hit with “increased costs for (re)insurance coverage or possibly a decrease in allocated (re)insurance capacity for less profitable risks,” Best points out.

In addition Best said: “Over the past several years, there have been various initiatives to make greater insurance capacity available to catastrophe-prone states, the most recent being the relaxation of collateral requirements in some states for foreign reinsurers operating within those jurisdictions. The imposition of this proposed tax would be in direct opposition to such initiatives.”

Best explained that under the existing rules – Section 4371 of the Internal Revenue Code – “foreign (re)insurers currently pay a federal excise tax (FET) on premiums booked in the United States but reinsured back to a tax-exempt country (usually Bermuda). This tax is paid on gross, not net premiums. Hence companies pay this tax before the deduction for expenses, commissions and losses incurred. The current FET rate on foreign companies is four percent for property/casualty insurance business and one percent for life insurance and reinsurance business.”

Although natural catastrophes occur throughout the world, Best notes that the “United States accounts for more than 70 percent of global cat risk, and foreign insurers and reinsurers absorb approximately 50 percent of the total losses on U.S. cat events.”

According to the ABIR, foreign reinsurers are expected to pay 50 percent of the incurred losses from major insured events such as Superstorm Sandy and hurricanes Katrina, Rita and Wilma.

Source: A.M. Best