Bermuda Concerned Over US Insurance Legislation

by Amanda Banks, Tax-News.com, London

26 November 2008

Warnings were voiced at a recent Bermuda insurance conference over the threat posed by US Congressman Richard Neal's legislation to Bermuda’s thriving insurance market.

Growing concern has mounted following the Congressman’s proposal, introduced into the House of Representatives in September, which would end the advantage of offshore reinsurance entities over American companies. The bill disallows deductions for excess reinsurance premiums with respect to US risks paid to affiliated insurance companies that are not subject to US tax. The legislation also provides the US Treasury with authority to prevent avoidance of the provisions of the bill.

At the recent conference XL Capital CEO Michael McGavick warned that the move would have a huge impact on the Bermudan insurance industry saying, “the threat to Bermuda's insurance industry coming from some quarters in Washington was more than just rhetoric.”

The threat was further emphasised by Finance Minister Paula Cox who said “the US tax issue is a real threat to Bermuda's national economic interests and a threat we take seriously,” although she added that the Bermuda government and insurance industry are lobbying hard to put their case across.

Bermudan insurers feel the move is unfair arguing that the reason why insurance firms are so prominent in Bermuda is because of the complexity of the US regulatory system, and the added complexity of having to file separate forms for each state.

Bradley Kading, President of Association of Bermuda Insurers and Reinsurers has described the move as a triple economic whammy for US citizens wishing to get insured and a straightjacket for insurers needing capital:

“The likely outcome of this discriminatory tax legislation would be to make it more expensive and difficult for US consumers to get insurance protection. This is not what American consumers need when they are also dealing with housing market chaos, financial instability and record high gas prices," he said in September.

According to Neal, since 1996, the amount of reinsurance sent to offshore affiliates has grown dramatically, from a total of USD4bn ceded in 1996 to USD34bn in 2007, including USD19bn alone to Bermuda affiliates. There has also been a steep rise in premiums written in the US by offshore entities, which have doubled in the last decade, representing USD54bn in direct premiums written in 2006. Again, Bermuda-based companies represent the bulk of this growth, although Switzerland is also a favourable jurisdiction due to its network of tax treaties.

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