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Senate Panel Told Offshore Insurers Given Unfair Tax Advantage

by Mike Godfrey,, Washington

27 September 2007

A leading industry executive, representing a coalition of 14 large US-based insurance groups, told the Senate Finance Committee this week that the future of the US insurance industry is under threat unless tax legislation is changed to reduce the incentive for companies to base themselves offshore.

William R. Berkley, chairman and chief executive officer of W. R. Berkley Corporation and spokesman for the Coalition For A Domestic Insurance Industry, told the committee hearing on offshore tax issues that foreign insurance groups based in jurisdictions like Bermuda or the Cayman Islands can legally avoid paying billions of dollars in taxes on much of their US underwriting and investment income, and that this has already caused significant migration of insurance capital abroad.

Berkley suggested that the tax advantage permits foreign-based insurers with US affiliates to move much of their taxable underwriting and investment income from their US-based businesses out of the country merely by reinsuring the business with a foreign affiliate in a low-tax or no-tax jurisdiction.

“By contrast, US-based insurers must pay current US tax on all of their income from these policies. Thus, even though the US income-generating activities are the same, these foreign-domiciled insurers can avoid US tax on much if not all of their underwriting and investment income," he observed.

According to data cited in Berkley’s testimony, in 2006, $54.7 billion of US premiums went to foreign insurance companies, with nearly 60% ($32.5 billion) of those premiums going to related foreign reinsurance companies. Since 1996, US premiums going to affiliated foreign reinsurers have increased at a compound annual growth rate of 23.3%, a rate that will push premiums going to foreign affiliates over the $100 billion mark by 2012.

In addition to avoiding US taxes on the related offshore underwriting income, Berkley noted that at the end of 2006, over $70 billion of assets held offshore were owed by affiliated foreign reinsurers to related US insurers as a result of affiliated reinsurance transactions.

“The data also demonstrates that the principal incentive for this increased related-party reinsurance activity has been the avoidance of US income tax,” he argued.

However, Donald Kramer, Chairman and CEO of Ariel Reinsurance Company, based in Bermuda, rejected claims that reinsurance companies choose to establish a presence in the jurisdiction solely on the basis of tax, noting that Bermuda in particular has one of the best-regulated reinsurance regimes in the world, with a deep pool of industry expertise.

"First and foremost, we are in Bermuda because we can quickly deploy our capital, form a company, get licensed and write insurance," he told the Senate finance panel. "Moreover, Bermuda is one of the world's centers of expertise in reinsurance. If you need reinsurance you go to the markets in New York, London, Zurich and Bermuda looking for coverage. Bermuda is now the leading center of excellence with regard to property catastrophe insurance."

"We have heard our critics say that we are in Bermuda because we want to avoid US taxation. That is simply not correct," he went on to add, concluding that:

"All premiums ceded to Bermuda reinsurers or paid by US businesses when they directly buy insurance from a Bermuda-based insurer is subject to the US insurance excise tax, a tax which is paid regardless of whether the insurance ultimately results in a profit or loss."

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