Florida Insurance Consumer Advocate to U.S. House Ways and Means Subcommittee: Taxing Foreign Reinsurers Will Hurt Consumers
Jul 14, 2010
Florida Insurance Consumer Advocate Sean Shaw testified this morning, July 14, 2010, before the U.S. House Ways and Means Select Revenue Measures Subcommittee in opposition to the taxing of reinsurance between affiliated entities.
“When elephants fight, the grass gets trampled,” Mr. Shaw said in his written testimony to illustrate his opposition to Subcommittee Chairman Richard E. Neal’s (D-MA) legislation (H.R. 3424). The bill would deny deductions for reinsurance premiums to related foreign entities that exceed an industry average by line of business.
Mr. Shaw presented economic statistics prepared by the Wharton School of Business that forecast a 20 percent decline in total supply of reinsurance if this legislation was passed. According to this data, the proposed legislation would result in Floridians paying in excess of $800 million per year in additional insurance costs, including $266 million per year to insure their homes and $264 million more per year to insure their commercial properties, including condominiums.
“If it was proved to me there would no impact on consumers, I would be fine (with the legislation),” Mr. Shaw said.
In reference to previous attempts to pass similar legislation, Congressman Peter Roskam (R-IL) said, “The Angel of Death passed over these companies last time.”
To view the Florida Insurance Consumer Advocate’s entire written testimony, click here.
William Berkley, Chairman and Chief Executive Officer of the W.R. Berkley Corporation, speculated that his business would expand in the United States if the legislation were passed. Because of the offshore tax benefit currently in effect, jobs associated with reinsurance have left the country, he explained. Therefore, in his opinion, the legislation would have the positive effect of restoring jobs to America.
Congressman Geoff Davis (R-KY) said that Florida’s Commissioner of Agriculture and Consumer Services Charlie Bronson had sent the Subcommittee a letter outlining his concerns about the potential effects of H.R. 3424 on crop insurance.
Mr. Berkley explained that H.R. 3424 would have no effect on crop insurance, because while most of its cost is borne by the federal government, and over 40 percent of the crop insurance underwriters are foreign-owned, it is competition that drives prices, not tax rates. “It’s fallacious thinking by a group of economists,” he added.
Mr. Shaw reminded the Subcommittee members that the price of reinsurance is especially sensitive in Florida and reiterated his opposition to H.R. 3424.
Representative Davis asked each panelist whether the legislation would better be incorporated as a part of a comprehensive tax package. Mr. Shaw said that, at least, the narrower focus of today’s hearing is bringing attention to the issue.
Representative Kendrick Meek spoke, saying that members of both parties have concerns with the bill. “(The bill’s merit) would be good on a sunny day, but this is not a sunny day in the State of Florida when it comes down to the reinsurance issue,” he said.
Representative Meek related that Senator Bill Nelson (D-FL) did not support H.R. 3424.
Mr. Berkley opined to Subcommittee members that the H.R. 3424 would not impact Citizens Property Insurance Corporation’s (“Citizens”) rates, since Citizens does not purchase reinsurance. “None of the Florida issues have anything to do with the reinsurance tax issue,” Mr. Berkley continued. “This is about foreign companies trying to pay the least amount of taxes . . . because billions of dollars are at stake.”
Mr. Degnan volunteered that, while Mr. Berkley’s company did very little business in Florida, his company, Chubb, in fact wrote a great percentage of Florida business. However, he echoed Mr. Berkley’s opinions on the legislation, saying that “If we don’t act, we will find ourselves without a domestic reinsurance industry.”
Mr. Degnan pointed to economic and statistical data in his possession indicating that H.R. 3424 would have no influence on property insurance premiums. In reference to the amount of tax subsidies currently in place for foreign reinsurers, he said “A $17 billion subsidy is not the way to help out homeowners.”
Representative Meek closed the discussion with a reminder that, in these difficult economic times, it is important to assure Floridians that they will not have to take on additional costs such as higher property insurance rates.
Below is a list of panelists and hyperlinks to their respective written testimonies included (click on the hyperlinks to view the corresponding testimony):
PANEL 1
Stephen E. Shay, Deputy Assistant Secretary for International Tax Affairs, United States Department of the Treasury
- Click here to view Mr. Shay’s testimony
PANEL 2
John J. Degnan, Vice Chairman and Chief Operating Officer; The Chubb Corporation; Warren, New Jersey
William R. Berkley, Chairman and Chief Executive Officer; W.R. Berkley Corporation; Greenwich, Connecticut
- Click here to view Mr. Berkley’s testimony
Sean Michael Shaw, Esq., Florida Insurance Consumer Advocate; Florida Department of Financial Services
- Click here to view Mr. Shaw’s testimony
Background (as provided by the Subcommittee):
Because of the unique nature of their business, the Internal Revenue Code provides special rules for the taxation of insurance companies. Taxable income of property and casualty insurance companies consists of the sum of underwriting income and income from investments reduced by allowable deductions. A property and casualty insurance company may deduct the amount of premiums paid for reinsurance, in which the insurance company transfers a portion of the risk to another company.
In 1984, Congress became concerned that tax avoidance or evasion was possible through reinsurance with related parties and enacted a rule allowing Treasury to reallocate, adjust, or recharacterize certain payments, credits, or deductions among related parties (26 USC §845). In 2004, expressing concern that “foreign related party reinsurance arrangements may be a technique for eroding the U.S. tax base,” this provision was expanded by Congress to allow Treasury to adjust the “amount” and not just the source or character of items (the “American Jobs Creation Act of 2004,” P. L. 108-357, Section 803).
Additionally, an excise tax applies on a gross basis to premiums paid to foreign insurers and reinsurers of US risks, at four percent for property and casualty insurance premiums and one percent for reinsurance and life insurance premiums (26 USC §4371); however, this may be waived by treaty.
President Obama’s Fiscal Year 2011 budget proposal contains a provision to deny a deduction for reinsurance premiums paid to related foreign reinsurance companies if the related foreign entity was not subject to U.S. tax with respect to those premiums and the amount of the premiums (less ceding commissions) exceeds 50 percent of the total direct insurance premiums received by the U.S. company and its U.S. affiliates for a line of business. Alternatively, a foreign corporation could elect to treat those premiums and the associated investment income as effectively connected U.S. income.
The budget document cited concerns that the tax advantages from related party foreign reinsurance could create incentives to reinsure more than would occur between unrelated parties acting at arm’s length.
Similarly, Subcommittee Chairman Neal (D-MA) has filed H.R. 3424, which would deny deductions for reinsurance premiums to related foreign parties that exceed an industry average by line of business.
In announcing the hearing, Chairman Neal stated, “Monitoring transactions between related parties is always a difficult task but even more so when insurance is involved. I look forward to hearing the testimony from experts who will inform our understanding of the industry and relevant tax laws.”
In addition to the issue of reinsurance between affiliated entities, the hearing also allowed for consideration of recent proposals that would impact certain reinsurance premiums paid to related foreign entities.
Should you have any comments or questions, please contact Colodny Fass.
To unsubscribe from this newsletter, please send an email to bellis@cftlaw.com.