1 November 2010News

The Neal Bill: still a looming threat

“Even if the Republicans take the house—which is the expectation—the issue will still be around next year”. Kading said. “Bill Berkley [chairman of US insurer wR Berkley Corp] is not giving up—he’s a man with a passion about the issue and he wants to keep pursuing the matter. In Congress next year, the Republicans will want to take a look at, and overhaul, the US corporate tax system. Both Bill Berkley and John Degnan at the ways and Means Hearing said that an issue that should be addressed is the high US corporate tax rates. Some of the leading Republican thinkers in the house up there in leadership positions certainly want to address corporate tax rates, so you might [expect to] see it come up as part of a base-broadening issue next year in Congress.”

Presently, however, Kading indicated that “the President’s Treasury department has said, ‘let’s look at transactions to see if there are abusive transactions, and if there are abusive transactions let’s target them’, so the President’s proposals create a safe harbour. The Neal Bill by contrast doesn’t create a safe harbour. It says that all these transactions are bad and let’s eliminate them.”

“If you take the Neal Bill and the trigger of the 12 percent limitation based on the use of unaffiliated reinsurance, and a historical average of the US market, it ends up disallowing 85 percent of the affi liated reinsurance that’s currently used”, Kading went on. “So if you disallow 85 percent of affi liated reinsurance, what do the US subsidiaries do? They will have to look at the options that they have.”

“There are a spectrum of options. If it’s a small company, it might just decide to close its US subsidiary and do their business on a cross-border basis. If you have a US subsidiary of some size and some capital, you may decide to go with the capital you have and not renew go with the capital you have and the business and just go with the current capital base that you have. Another option is to raise new capital, or you could buy more unaffi liated reinsurance,” Kading explained.

Addressing the Brattle Group study, Kading indicated that it had concluded “that raising capital or using capital in lieu of affiliated reinsurance is more expensive. If companies chase after unaffi liated reinsurance it createsa supply-demand imbalance that causes prices to go up for unaffiliated reinsurance, whilst overall there is a shortfall of 20 percent in the supply of reinsurance to the US market and that then leads to price increases for consumers of $11 billion to $13 billion across all lines.”

The study then does “a sub-set of the catastrophe exposed states”, Kading said. “That sees the Florida market get hit in two ways. It gets hit by the direct use of affi liated reinsurance by about 10 percent of the Florida home insurance writers—and in Florida, 10 percent of the home insurance market is pretty important. If you take out State Farm at 15 percent you take out Citizens at 15-20%, then 10% of the Florida home insurance market is pretty important. That 10 percent associated with three or four companies would be targeted in any affi liated reinsurance measures. The second way Florida gets hit, is this rise in general reinsurance prices and Brattle comes to the conclusion that the measure hits Florida home owners with about $266 million in extra costs, and overall the Florida market pays an extra $600 to 700 million.”