The new proposal to amend the Internal Revenue Code of 1986, which is to prevent global insurers from avoiding taxes through reinsurance with non-taxed affiliates, could be disastrous for areas frequently affected by hurricanes, crop failure, earthquakes, and other calamities.
According to the article, published by J. David Cummins, professor at Fox School of Business at Temple University, and Bradley Kading, president of the Association of Bermuda Insurers and Reinsurers; the H.R. 3157, proposed by Congressman Richard Neal of Massachusetts, and S.1639, proposed by Senator Mendez of New Jersey, would increase costs for consumers and businesses. According to them, the new taxes pose challenges for reinsurers to survive and provide back-up insurance coverage in high-risk areas.
Based on the proposed legislation, insurance companies based in the United States will no longer be able to claim the amount of reinsurance premiums, paid to their foreign affiliate, as ordinary business expense of tax deductions on their corporate tax returns.
According to Cummins and Kading, reversal in the current tax policy would increase the tariff costs for international reinsurance companies.
Cummins and Kading cited a study conducted by The Brattle Group, an economic consulting firm, based in London, for the insurance industry coalition, which found that this proposed legislation does “threaten to drastically raise insurance rates” across the United States. The research also found the net supply of reinsurance in the country would decline by 20 percent, and the insurance market would suffer disruption, due to failure in raising revenue.
Based on the study, insurance companies in the United States are highly dependent on international reinsurers, who provide almost two-thirds of their back-up reinsurance coverage for catastrophes. Forty percent (40%) of the reinsurance providers are located in Bermuda.
The Battle Group estimated that the proposed tax amendment would increase the insurance costs in the United States by 2.1 to 2.4 percent, and the insurance costs for industries would climb to as much as 9 percent. According to the study, it would cost an additional $11 billion to $13 billion a year to maintain the current level of insurance coverage for consumers in the United States.
Cummins and Kading pointed out that the United States needs a robust insurance market, open to competitors, in order to encourage foreign investments, particularly from Bermuda, due to the existence of an increased threat of natural disasters. Based on the analysis, conducted by Karen Clark & Company, on hurricanes that occurred in the country for more than a century, they estimated that the country could suffer $10 billion in insured losses from hurricanes every year.
They pointed out that the new restrictions on tax exemptions for the insurance industry is damaging for consumers, as the need for global reinsurance continue to increase.
In addition, Cummins and Kading noted that the reinsurance regulations in Bermuda meet or exceed the standards implemented by insurance regulators in the United States, as well as international regulatory standards. They also cited that the financial regulators in Bermuda have cooperative agreements with their American and international counterparts.
Furthermore, they emphasized that Bermuda helped the reinsurance industry to develop excellent practices in serving consumers. SAC Capital Advisors is one of the global companies with reinsurance businesses based in Bermuda. According to the company, its reinsurance business, which started in July with an initial capital investment of $500 million, is growing.