ALL EYES ON
CONGRESS, AGAIN
A group of American insurers, many with Bermuda operations,
have again asked Congress to punish non-US reinsurers.
Roger Crombie reports on the latest developments.
Late in September, some very large US insurers asked the US Senate
Finance Committee to change the rules that enable some of their
competitors “to avoid billions of dollars in federal taxes by sending
money to themselves” in Bermuda, Cayman and other tax havens.
At issue, the companies said, were “Federal rules that allow insurance
premiums to pass from the United States to offshore affiliates”, and that
allow the proceeds to be invested tax-free, increasing the profit to parent
companies.
The Bermuda companies argued in response that they are following
the very letter of the tax code—an assertion it is hard to doubt, given
the scrutiny with which their activities are monitored.
The last time this question surfaced in Congress was in 2000, when
supporters of HR 4192, or the Johnson/Neal Bill, proposed legislation
aimed at ending “favourable tax treatment” for foreign-based insurers,
principally those located in Bermuda. The main backers then were
Chubb and Hartford, which are also members of the current Coalition
for A Domestic Insurance Industry.
The Coalition is composed of AMBAC Financial Group, American
Financial Group, W.R. Berkley, Berkshire Hathaway, Chubb, EMC
Insurance, The Hartford Financial Services Group, Liberty Mutual,
Markel Insurance, MBIA Insurance, Safeco, Scottsdale Insurance (a
Nationwide subsidiary), The Travelers and Zenith Insurance. As a group,
the Coalition has more than 150,000 employees, and total assets in excess
of $1 trillion, with offices and employees located throughout the US.
In 2000, as it is today, the industry was entering a soft market
cycle. The core of the dispute is US tax regulations, which since the
Second World War have reduced the profitability of American companies
and with it, their viability, in some instances.
The US taxes its citizens and companies on their worldwide
income, regardless of its source. Other countries, such as Britain,
tax only the income that arises within their borders. This handicap
is what makes the playing field uneven for American companies,
but neither political party in the US has indicated any desire to change
the tax code in this area. Nor, it should be said, have they shown any
inclination to listen to the Coalition.
Americans and American businesses paid $499 billion for
property and casualty insurance in 2006, nearly four cents out of each
dollar of the gross national product.
The charges
The Coalition contends that when an American affiliate
buys reinsurance from its Bermuda parent, the company is merely
moving money from one pocket to another. A result, they say, is an
unfair profit for the offshore company and lower taxes paid to the
Federal Government.
The Congressional Joint Committee on Taxation, which advises the
Senate Finance Committee, said that from 2001 through 2006, purchases
by American subsidiaries of reinsurance from their parent companies in
Bermuda rose by $16.6 billion, to $32.5 billion.
That is more than 20 times the rate of growth in similar spending by
companies based in the United States that do not qualify to “transfer”
money as their Bermuda competitors do. Their purchases from unrelated
offshore companies rose just $700 million, to $22.2 billion in the same
period, the Coalition said.
William R. Berkley, the chief executive of W. R. Berkley and a leader
of the Coalition, said that unless the law is changed, “in 10 or 15 years,
all the domestic property and casualty insurance companies are going to
have to go offshore”.
Berkley and the others are using two appeals to lawmakers: moral
outrage and threats to take their money to Bermuda themselves. “I
think it’s morally wrong,” Mr. Berkley said, “but if we can’t get the
Government to change the rule, we may ultimately have to do it.”
According to data cited in Mr. Berkley’s testimony, growth in relatedparty
reinsurance written to foreign affiliates has been dramatic. In 2006,
$54.7 billion of US premiums went to foreign insurance companies, with
nearly 60 percent ($32.5 billion) of those premiums going to related
foreign reinsurance companies. Since 1996, US premiums going to
affiliated foreign reinsurers have increased at a compound annual growth
rate of 23.3 percent, a rate that would, if continued, push premiums
going to foreign affiliates over the $100 billion mark by 2012.
Congressional aides said several members of the Senate Finance
Committee favour revising the Federal tax law to force Bermuda-based
companies to pay taxes at the standard corporate rate of about 35 percent,
based on their worldwide income, even though they are not American
companies.
A different view
The Bermuda companies fought back this time, under the banner of the
Association of Bermuda Insurers and Reinsurers (ABIR). The companies
contend that they are doing nothing wrong and are following the
United States’ tax code. Moreover, they say, the tax law is a valuable
tool for attracting foreign investment to the United States and should
not be changed. The foreign investments, the ABIR companies say, are
far more important to the American economy than any taxes forgone
in the transactions.
Donald Kramer, chairman and chief executive officer of Bermuda-based
Ariel Reinsurance, provided the official response, in a written statement
presented to the Senate Finance Committee. Kramer pointed out that “a
substantial percentage of US insurance companies cede more that half
of the gross premiums they write to reinsurers. Affiliate reinsurance is
used routinely with the US-based insurance company groups, for valid
non-tax reasons.” The practice enables related groups of companies to
“pool risks and manage them more efficiently”, he added.
He said the notion that Bermuda companies are located on the Island
“to avoid US taxation” is “simply incorrect”.
He pointed out that a reinsurance transaction, even among affiliates,
involves the true transfer of risk. In addition, he said: “Regulation
requires the price in a reinsurance transaction to be an arm’s length
price; therefore, these transactions must be respected for tax purposes.”
Attached to Kramer’s statement were letters from Risk
and Insurance Management Society president Michael Liebowitz and Bill
Newton, executive director of the Florida Consumer Action Network.
“RIMS has a history of opposing any legislation that encumbers
free market movement and the transfer of risk that is vital to a
sound global insurance and reinsurance community,” Liebowitz
wrote. “We strongly urge you to oppose any legislation that would
result in negative implications for the global reinsurance marketplace
and, more importantly, those US businesses that rely on this market to
manage their risk exposure.”
Nelson was even more specific. “We urge you (the Senate Finance
Committee) to be on the lookout for amendments proposed
this summer and fall that offer hundreds of millions in additional
revenue that in the end will be paid for by Florida consumers,”
Nelson wrote. “It’s not a good deal and these amendments should
be exposed as protectionist measures by US insurers seeking to
grab more business for themselves by increasing the taxes on their
non-US competitors—taxes ultimately paid by Florida consumers.”
Kramer also said that a change in the tax law would probably mean
higher insurance prices for many Americans.
“Why Bermuda?” Kramer asked. “We are in Bermuda because
we can quickly deploy our capital, form a company, get licensed
and write insurance. No other jurisdiction does this as well as
Bermuda. Insurers deploy their capital to meet critical market needs,
whether in the US, Asia, Latin America, Europe or the rest of the
world. Capital is not trapped in regulatory frameworks that limit
the insurer’s flexibility to exit or enter markets.”
Among Kramer’s other arguments were:
• ABIR members wrote $56 billion in premiums during 2006.
• Non-US insurers and reinsurers paid more than 60 percent of
the World Trade Centre insurance claims.
• Fifty percent of claims from Hurricane Katrina were paid by non-US
reinsurers (24 percent were contributed by Bermuda alone).
• ABIR members’ US subsidiaries pay full US corporate income taxation
and employ 17,000 people.
Kramer also pointed out that reducing the ability of non-US reinsurers
to do business in the US, including increasing the tax charges they face,
would affect thousands of US employees and likely mean a far slower
recovery for businesses and residents when they are hit by a disaster or
catastrophe.
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"In 2000, as it is today, the industry was entering a soft market
cycle. The core of the dispute is US tax regulations, which since the
Second World War have reduced the profitability of American companies
and with it, their viability, in some instances."
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