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A new economic analysis prepared by the consulting firm LECG on behalf of the Coalition for a Domestic Insurance Industry has questioned the purported effects of the Neal Bill on insurance capacity and consumer pricing in the United States.
The bill, introduced in 2009 by Richard E. Neal, the Democrat Party’s Ranking Member of the House of Representative Subcommittee on Select Revenue Measures, is aimed at ending what he has called “the use of excessive affiliate reinsurance by foreign insurance groups to strip their US income into tax havens, avoid tax, and gain a competitive advantage over American companies.”
“The benefits of being headquartered in a tax haven can be quite significant for a company with investment income over long periods of time,” he added. “Use of affiliate reinsurance allows foreign-based companies to shift their US reserves and their investment income overseas into tax havens, thereby avoiding US tax.” It was said that the bill would “recapture an estimated USD17bn in revenue for the Treasury.”
According to the report issued by the Brattle Group in 2009, US consumers would have to pay billions of dollars in higher insurance premiums if Congress passes the Neal bill and imposes a higher tax on foreign insurance companies. The study said that the proposed bill would cost consumers an additional USD10bn-USD12bn per year to maintain their current insurance coverage.
Additionally, it calculated that the legislation would significantly weaken competition and reinsurance capacity in the United States by 20%, and pointed out that past evidence in insurance markets indicates that, when reinsurance capacity is reduced, consumers will find it difficult to obtain insurance in certain classes of business.
However, according to Christian DesRochers, Senior Managing Director at LECG, “our analysis found significant shortcomings in the Brattle Group’s assumptions and methodology. Thus, the Brattle Report fails to make a compelling case that passage of the Neal bill would adversely affect insurance capacity or pricing for consumers.”
Among the questions posed by LECG over the Brattle Report’s analysis are that affiliate reinsurance serves a different purpose to, and is not a substitute for, third party reinsurance. In contrast to third party reinsurance, it said, affiliate reinsurance merely moves risk from one pocket to another; it does not remove risk from the group and does not create additional underwriting capacity.
In addition, LECG postulated, foreign-based groups are unlikely to stop using affiliate reinsurance if the Neal Bill is enacted. They merely would have to pay tax, just as their US competitors do. In any case, even if the Brattle Report were correct regarding diminished use of offshore affiliate reinsurance, it overstates the potential effect any such reduction would have on overall insurance capacity, as the market would quickly act to replace it (for example, through other providers or capital market alternatives to reinsurance).
However, a Florida Insurance Consumer Advocate, Sean Shaw, in a recent statement in opposition to the Neal bill before the House Committee on Ways and Means, repeated concerns that Neal’s proposal would have damaging effects on consumers in Florida and other disaster-prone areas by increasing insurance costs. He asked the House “to reject this tax by recognizing that it will do nothing more than increase the pricing power of a handful of large and already hugely profitable insurers who want to put a crimp on their competitors.”A comprehensive report in our Intelligence Report series which studies the 20 main offshore jurisdictions which offer captive insurance regimes is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report11.asp
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