President's Budget Includes Measure To Close Tax Loophole That Favors Foreign-based Insurance Groups

Foreign Insurers Use Deceptive Scare Tactics to Preserve Unfair Tax Advantage

Apr 12, 2013, 13:56 ET from The Coalition for a Domestic Insurance Industry

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.

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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.

"Even if opponents' claims were true (which they're not), any purported effect on pricing or capacity would arise from an unintended tax subsidy for foreign-based companies at the expense of their U.S. competitors and other U.S. taxpayers," said William R. Berkley, Chairman & CEO of W. R. Berkley Corporation, a member of the Coalition for A Domestic Insurance Industry. "Would Congress ever intentionally pass a tax subsidy only applicable to foreign-based companies?  The answer is clearly no. At a time of burgeoning deficits and possible tax increases on U.S. workers and businesses, it's unfathomable that we would continue this unintended loophole allowing foreign-based insurers to avoid U.S. tax on their U.S.-based business."

Both the House Ways and Means Committee and Senate Finance Committee have held full committee or subcommittee hearings on this growing concern in the last few years.  Legislation has been filed in both Houses to close this loophole in order to level the playing field between U.S. and foreign-based companies. This proposed legislation has been developed working with the tax experts at both the Treasury Department and the staff of the Joint Committee on Taxation to address concerns that have been raised with prior versions of the bill, including a mechanism for foreign-based insurers to avoid double taxation, and to develop a balanced approach to address this loophole.  The proposal is consistent with our trade agreements and our tax treaties and is far from protectionist.

As Congress and the Administration explore options to prevent base erosion aimed at U.S. companies that might seek to strip earnings out of the U.S., it is encouraging that they are also considering proposals that combat base erosion by foreign companies that strip earnings out of the U.S. to their foreign parent offshore. It is time to close this loophole and prevent further erosion of our tax base.

The Coalition for a Domestic Insurance Industry represents thirteen U.S.-based insurance groups with more than 150,000 employees in offices located throughout the United States. Collectively, we pay tens of millions of dollars in taxes, invest significantly in the municipal bond market, and offer millions of U.S. individuals and businesses financial protection from unpredictable risks.

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Contact:   Karen Horvath

Phone:     203-629-3000

SOURCE The Coalition for a Domestic Insurance Industry