16 April 2013News

‘Direct attack’ on international reinsurance faces US political intransigence

The US budget has revived efforts to impose a discriminatory tax on international re/insurers, but its passage remains tied to the ‘grand bargain’ yet to be struck over the economic recovery.

The Obama administration has once again sought to introduce into law a change in the US tax system that would disallow the deduction forreinsurance premiums paid to foreign affiliates, in a move described as a “direct attack on the business models of international reinsurers”, by Brad Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers.

Although the executive’s budget content is generally regarded as being “dead on arrival” when it hits the Senate and House of Representatives for consideration, Kading said that it is clear that the Obama administration is keen to include the tax reform measures in ongoing ‘grand bargain’ discussions taking place between Democrats and Republicans. Those discussions revolve around establishing a long-term blueprint to put US finances in order following the financial crisis. A deal—if it comes together—will likely entail reducing entitlements, particularly Medicare and Medicaid, and increasing revenue raising—which will include closing tax loopholes and simplifying the tax system.

Taxing affiliate reinsurance will likely be regarded as an attractive option by some in the House and Senate. However, passing any laws that change the US tax system will likely prove tricky, said Kading. Politics will inevitably come into play, and with elections for the Senate and House next year; tax reform could prove something of a political football. Kading suggested that discussions may yet coalesce around the debate to resolve the debt ceiling, due in the summer, but this is evidently an issue that has legs.

A tax cudgel

Kading and the ABIR has taken a leading role in fighting a discriminatory tax on international reinsurers for seven years now—working alongside the Coalition for Competitive Insurance Rates— with similar measures having appeared in four of the last five Obama budget’s. It’s reappearance in this year’s budget will inevitably help to “freshen the debate” over US tax reform, but such measures continue to present a challenge not to only Bermuda, but all international re/insurers with US subsidiaries.

“This is an attack on the business model of all global re/insurers, for whom the ability to pool risk globally onto a central balance sheet is key”, said Kading. “In doing so, re/insurers are able to diversify their sources of risk, enabling them to write more capacity and ultimately helping the end consumer”. The proposed law changes threaten to bring this to an end.

“There are those in the US who are looking to take up the tax cudgel against international re/insurance”, said Kading. The industry will be watching developments in Washington with interest, with Kading warning that re/insurers must “be vigilant”. It looks likely that further heated debate and lobbying is in the offing, both in Washington and further afield.