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“ The US is far and away the largest market for insurance in the world. It’s disingenuous for foreign insurers to threaten to abandon this market if reasonable limits are imposed restricting their tax advantage. Somehow their US-based competitors have managed to remain profitable while paying their fair share of tax—and they have done so while charging competitive rates, meaning that taxes are already factored into the pricing equation.”


The legislation will not cause prices to rise nor prevent coastal residents from obtaining protection from hurricanes, because the primary US homeowner insurers are US-based.


Claims that pay out quickly, such as those for catastrophe losses, provide


little benefit from having investment income accrue in a low-tax or no-tax jurisdiction, because there is just too little time, which is why they are not ceded offshore. In addition, catastrophe losses are deductible in the US for tax purposes. If anything, corrective legislation could increase available capital for reinsurance.


Moreover, closing the loophole will have little or no impact on


the availability or cost of insurance coverage. Opponents to the bill commissioned a thick report by renowned scholars that is little more than an academic exercise in Economics 101 to demonstrate how increasing the cost of producing a product is passed on to the consumer until supply and demand reach a new equilibrium. But this academic exercise simplifies a very complex industry, ignores the realities of behavioural economics and insults the intelligence of anyone who understands the business dynamics of the property casualty insurance industry. The reality is that property and casualty insurance is a highly competitive market—if costs rise for only a portion of market participants, the end price to the consumer does not change. Rather, the affected group will rationalise its cost structure to remain competitive.


The US is far and away the largest market for insurance in the world.


It’s disingenuous for foreign insurers to threaten to abandon this market if reasonable limits are imposed restricting their tax advantage. Somehow their US-based competitors have managed to remain profitable while paying their fair share of tax—and they have done so while charging competitive rates, meaning that taxes are already factored into the pricing equation.


The opposition is also trying to confuse the facts by calling legislation


to close the loophole a “new” tax. There is no “special tax increase” or “punitive tax” as they mischaracterise it. The Neal Bill simply seeks to close a loophole and require foreign-based companies to pay tax on income from their US business that they have legally avoided for years. The legislation does not afford any special treatment or consideration to US insurers. It simply reduces an unfair competitive tax advantage that favours foreign-controlled insurers at the expense of US taxpayers. In fact, any foreign-owned insurer may eliminate the entire issue by electing to be taxed on its US business as a US taxpayer—creating a truly level playing field.


And Washington can rest assured that this is not about erecting trade


barriers. It is simply a matter of establishing tax fairness. No foreign-owned company operating in the US should be allowed to avoid most of its taxes simply because its offshore parent can shift money from one pocket to another. The proposed legislation is completely consistent with US tax treaties.


Experts on the Joint Tax Committee staff, who are responsible for


reviewing every tax treaty before adoption by Congress, substantiate this fact. In addition, the experts at Covington & Burling LLP stated: “Because the Neal Bill does not draw distinctions based on national origin, levels the playing field between similarly situated reinsurers, and is based on objective criteria regarding the deductibility of payments that erode the U.S. tax base, it does not represent a violation of the U.S. commitment to provide national treatment to foreign reinsurers.”


Its report went on to conclude: “HR 3424 clearly falls within the scope


of GATS Article XIV (d) as a measure aimed at ensuring the equitable or effective imposition or collection of direct taxes.”


It is imperative for the US, which represents almost half the world’s


property casualty premiums, to have a vibrant domestic insurance industry. It is not good public policy for our country to gradually lose regulatory control over what is in reality a US domestic insurance business.


Now is the time to staunch this flow of income overseas. US insurers


and brokers can assist in the effort by urging members of Congress to vote for the Neal Bill. At a time of burgeoning federal deficits, it seems unfathomable that we would continue to allow foreign-based insurers to avoid US tax on their US-based business. And it is untenable that we would favour foreign companies over US insurers in serving the US market. This is why legislation to close this loophole (HR 3424) and recapture an estimated $17 billion of revenue for the US Treasury has been introduced in Congress, and a similar measure has been included in the President’s budget.


During this time of economic uncertainty and record-setting federal debt,


our nation should not be subsidising foreign companies at the expense of other taxpayers. We simply cannot afford to throw away billions of dollars. These days, Americans have enough to be worried about without foreign insurers launching a phoney scare.


The Coalition for a Domestic Insurance Industry can be contacted at: www.coalitionfordomesticinsurance.com


November 2010 | INTELLIGENT INSURER | 37


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