NU Online News Service, Oct. 14, 2:57 p.m. EDT

Legislation introduced that would place significant restrictions on domestic insurers that cede reinsurance to their foreign affiliates is being strongly opposed by the Risk and Insurance Management Society, (RIMS), which it says could ultimately impact capacity.

According to RIMS, the proposed legislation, introduced by Rep. Richard Neal, D-MA, and Senator Robert Menendez. D-NJ, would disrupt the global insurance marketplace, making commercial insurance less available and affordable to U.S. consumers.

The scope of the bill would impact a majority of the industry, but particularly consumers in areas of the country subject to natural disasters as well as terrorism risks.

"From a capacity standpoint, if we take away one of the tools for reinsurers, it's going to reduce their ability to share risk and therefore have a deleterious effect on capacity," John Phelps, board liaison to RIMS External Affairs Committee and director, business risk solutions, Blue Cross and Blue Shield of Florida Inc., tells NU Online News Service.

At the same time, he says, if reinsurers are restricted in how they can manage their portfolio risk, "then it will increase the cost of insurance domestically, because their opportunity to use a foreign reinsurer to lay off some of that risk is taken away. Therefore, it will be more expensive for the limited capacity that's left. Cost and capacity are always inextricably linked."

The bottom line for buyers, Phelps says, "is that, especially in this economy, we need all the tools in the toolbox that we can get. If you start taking some of that away, it will have an impact on capacity and a knock-on impact to the premiums we have to pay and share with our customers."

He explains that the proposed legislation would heavily impact risk managers with large property, "especially in catastrophe areas, like where I am, in Florida. It's difficult if you have significant property, like a school board or [an owner of] retail stores or a chain outlet, to have the capacity in those areas, because insurers don't want to risk their capital in areas where there could be hurricanes."

He adds, "You have to be able to share that risk to make it viable for carriers to offer the coverage—and at a rate that we can afford."

Phelps also points out that more businesses are impacted now because capacity areas have widened. Tornadoes, earthquakes and other catastrophes are happening in places where they didn't occur in the past—such as a recent earthquake that shook Washington, D.C. and New York.

"It's redefining what's considered to be catastrophic, and carriers are looking at this and being more conservative in where they apply their capital," he says.

Phelps says that by disallowing the tax deduction for reinsurance premiums ceded by U.S. insurers to offshore affiliates, "the legislation will inevitably dismantle a legitimate practice in risk management which facilitates the shifting and pooling of a variety of risks from a domestic insurer to an affiliate reinsurer."

Phelps adds, "During this period of consumer uncertainty and economic fragility, now is not the time for tinkering with this provision of the tax code, especially when economists forecast that a change could cost individual and commercial consumers over $10 billion a year."