Tax Reform Bill Would Impose Excise Penalty on Global Reinsurers
WASHINGTON – The U.S. House Republican tax reform bill would impose an excise tax on transactions between U.S. reinsurers and their foreign-based affiliates, a move global reinsurers said could upend the markets and make coverage both more expensive and less available.
Language in the tax bill remains fluid and there is a chance the excise tax language could be removed from the final version before it reaches the House floor the week of Nov. 13. But it was in the latest version of the tax bill debated Nov. 9 before the House Ways and Means Committee. Lawmakers said the provision is meant to prevent companies with operations around the world from using cross-border maneuvers to minimize their U.S. tax burden.
But, the proposed tax will make it more expensive for U.S. reinsurers with foreign affiliates to do business here, Brad Kading, president, Association of Bermuda Insurers and Reinsurers, told Best’s News Service. The reinsurance market is reeling from hurricane and wildfire catastrophes this year and is looking at significantly higher prices on Jan. 1, he said.
“If you are reducing the supply of reinsurance, in a year when large losses will be driving the prices up everywhere, then the prices are going to go up,” Kading said.
Under the bill, any transactions between a U.S. carrier and its foreign affiliate would be subject to a 20% excise tax. The penalty would force U.S. reinsurers to replace their offshore affiliates with either capital or non-affiliate reinsurance, which would shrink the available reinsurance pool by about $18 billion, according to industry estimates. U.S. consumers would have to pay $5 billion more per year to obtain the same coverage they now have without the excise penalty, the association said.
“Americans benefit by exporting this risk to shareholders around the world,” Kading said. “If you have a tax policy that dis-incentivizes the ability to export this risk, you will be asking Americans to pay more for the same insurance.”
Replacing lost coverage is complicated by U.S. regulatory hurdles and difficulties in raising external equity capital quickly, according to an analysis of cross-border tax policies by the Brattle Group. As a result, reinsurers and insurers would pass on the price impact to consumers.
Under existing law, domestic insurance companies may deduct the cost of reinsurance — whether from a foreign or domestic source — as a legitimate business expense. Property/casualty insurers use it to manage their exposure to catastrophically large risks, which are diversified around the globe.
The penalty would restrict reinsurers’ ability to globally spread around that risk, said the Coalition for Competitive Insurance Rates.
“When it comes to extreme risk, all insurance companies, U.S. and foreign-based, use reinsurance in order to most efficiently and safely pool catastrophic and other risks and match capital to support those risks,” it said in a statement. “Such pooling diversifies risk into a global portfolio providing substantial price and capacity benefits to insurance markets globally.”
“Taxing global reinsurers as a means to provide a competitive advantage to U.S.-based insurance companies is a very risky and unnecessary move,” it said.
The timing of the tax penalty is unfortunate, said R Street Senior Fellow R.J. Lehmann.
“The reinsurance rates are already going up,” Lehmann told Best’s News Service. “We anticipate companies will be paying 25% more because of the impacts of the storms and the wildfires.”
The tax would raise an estimated $155 billion over a decade, which the Republicans plan to use to off-set tax cuts elsewhere. The reform package, the Tax Cuts and Jobs Act (H.R. 1), would reduce the corporate rate to 20% from the current 35%, shrink the number of individual tax brackets and double the standard deduction for individuals. Lawmakers hope to have a finished package to the president by Christmas (Best’s News Service, Nov. 2, 2017).
The Senate is pursuing separate but parallel tax reform legislation.
(By Frank Klimko, Washington correspondent, BestWeek: Frank.Klimko@ambest.com)