NU Online News Service, Feb. 2, 3:42 p.m. EST

WASHINGTON–Insurance industry representatives said President Obama's new effort to tax insurers who cede premiums to overseas affiliates is far tougher than previous proposals aimed at low-tax offshore havens.

The Obama administration's concept contained in the budget it released yesterday unleashed withering criticism from a spokesman for Bermuda insurers as well as officials of the Risk and Insurance Management Society Inc., which represents commercial insurance buyers.

RIMS attacked the administration for seeking to reduce by $250 million the federal backstop for terrorism risk coverage and taking other steps that they said would discourage the availability of reinsurance capacity in the private sector.

Moreover, RIMS officials projected that enactment of the reinsurance provision would raise the cost of insurance in both the personal and commercial markets by $10-to-$12 billion a year.

"This far exceeds the revenue estimate of $233 million savings the administration is projecting over five years at a far greater cost to individual policyholders and businesses of all types and sizes," said Scott Clark, RIMS secretary and director of RIMS External Affairs Committee. He is also risk and benefits officer for the Miami-Dade County School Board.

The offshore tax proposal would affect all insurers, not just insurers in such offshore havens such as Bermuda.

"It would apply to all insurers not subject to U.S. income tax," said Joseph Sieverling, senior vice president and director of financial services for the Reinsurance Association of America.

Moreover, the tax would be steeper than that proposed in prior proposals dating back more than a decade.

It would require foreign insurers ceding premiums to offshore affiliates to pay a tax if the amount of reinsurance premiums (net of ceding commissions) paid to foreign reinsurers exceeds 50 percent of the total direct insurance premiums received by the U.S. insurance company and its U.S. affiliates for a line of business, he said.

Legislation proposed in the past by Rep. Richard Neal, D-Mass., would only have disallowed a deduction if the amount ceded exceeded the industry average, Mr. Sieverling said.

Bradley Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers, Washington, D.C., said that the administration in its budget proposal also seeks to reduce its subsidy for terrorism risk insurance by $250 million, citing strong capacity for this type of coverage.

Yet, Mr. Kading said, on the other hand it effectively would restrict industry capacity by imposing new taxes on affiliated reinsurance.

"Affiliated reinsurance is key to global risk spreading, diversification of risk and pooling capital to handle large loss business," Mr. Kading said.

He noted that 64 percent of losses from the Sept. 11, 2001 terrorism event were paid by foreign insurers and reinsurers.

"Affiliated reinsurance was central to paying these extraordinary claims and was the key to recapitalizing U.S. subsidiaries so they could write coverage going forward," he said.

The same thing is true with hurricanes and earthquakes and large liability claims, said Mr. Kading.

"If you cede premium, you cede claims. If you pay claims from your non-U.S. companies, then you don't get a U.S. tax deduction for your U.S. losses," Mr. Kading said.

"Non-U.S. groups and U.S. groups use equivalent amounts of affiliated reinsurance," he said. "If there is an abuse, current U.S. law already empowers the IRS to take action."

Mr. Clark agreed. "There is an inherent conflict in policy goals," he said.

"The administration is curtailing the government's commitment to ensure a stable market for terrorism insurance," he said.

At the same time, Mr. Clark said, the administration "is acting to restrict one of the primary means the industry uses to manage its terrorism risk through reinsurance."

"RIMS intends to strongly oppose both proposals," he said.

If the tax is imposed, it would become effective Jan. 1, 2011.