US Insurance Changes Would Be Costly For Consumers

by Mike Godfrey, Tax-News.com, Washington

11 May 2009

A study found that Rep. Richard Neal’s proposed bill to impose higher taxes on foreign-owned insurance and reinsurance providers would cost consumers an additional USD10-12bn per year in higher insurance premiums to maintain their current insurance coverage.

The price increase would be higher for certain types of insurance that carry greater risk. Product liability insurance premiums could rise by as much as 6%, and earthquake insurance premiums by 5%, according to the study.

Also the legislation could weaken competition and reduce reinsurance capacity in the US by 20%. The tax could be especially damaging to disaster prone areas such as California, Florida and the Gulf Coast. This tax proposal was considered during the last Congress, and Rep. Neal is expected to introduce similar legislation in the coming month.

The tax legislation targets the US units of foreign insurers that write policies in the US and pass on the premiums to offshore affiliates for reinsurance. Reinsurance is commonly used by insurers to spread risk, and the reinsurance premium can be a tax deductible expense in the US.

Neal and other bill supporters in Congress contend that much of this offshore reinsurance is motivated by the desire to reduce US tax liabilities. Neal states that this disadvantages American companies over foreign insurers.

The bill would involve establishing a means of assessing an arm's length market premium for reinsurance, and taxing all premiums that are ceded to offshore affiliates in excess of this guide price. The Brattle Group study reported that 87% of all offshore affiliate reinsurance premiums, or USD23.9bn, would be classified as "excess" under the Neal bill and subject to the tax.

While President Obama made no specific mention of insurance companies in his White House remarks on May 4, he reiterated support for the work of Senate Finance Committee Chairman Max Baucus, D-Mont., on this issue. Under draft legislation unveiled by Baucus last month, tax deductions for reinsurance paid from US affiliates to foreign-controlled parents offshore would be disallowed to the extent they were above and beyond guidelines for an "excess" amount, determined by line of business.

Introducing Obama's proposals, Treasury Secretary Tim Geithner said the tax code changes would close "indefensible tax breaks and loopholes" and go towards achieving the administration's goal of a more fair tax structure. "We will no longer provide tax incentives that discourage US investment," he said.

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