Berkshire Hathaway lead a coalition to close tax loophole for overseas insurers

Berkshire Hathaway is leading a lobby group to get US politicians to close a current loophole which allows foreign-based insurers to underwrite US risks.

The Coalition For A Domestic Insurance Industry, a group of 14 major U.S.-based insurance groups including giants Travelers, Safeco, Chubb, The Hartford Financial Services Group, American Financial Group, Markel Insurance Company, EMC Insurance and WR Berkley.

The coalition "applauds" the introduction of a bill by US Massachusetts representative Richard Neal, to level the playing field and close the current loophole that provides foreign-based insurers a competitive advantage over domestic insurers in underwriting US risks.

"This unfair tax advantage arises because foreign insurance groups operating in the US are presently allowed to strip the bulk of their profits out of the US merely by reinsuring risks to affiliates located in tax havens, and thus avoid paying billions of dollars in US taxes," the coalition said. "The tax treatment of these transactions undermines the ability of domestic companies to compete and ultimately threatens the future of our domestic insurance industry."

“The tax advantage, which originated in practice around 20 years ago, has already caused significant migration of insurance capital abroad,” explained William R. Berkley, chairman and chief executive of W. R. Berkley Corporation and spokesman for the Coalition For A Domestic Insurance Industry.

Growth in related-party reinsurance written to foreign affiliates has been dramatic. In 2007, $58.4bn of U.S. premiums went to foreign insurance companies, with nearly 60 percent ($33.8bn) of those premiums going to related foreign reinsurance companies. Since 1996, U.S. premiums going to affiliated foreign reinsurers have increased at a compound annual growth rate of 21.4%.

“With the stroke of a pen, foreign-based groups can shift their profits overseas to affiliates in tax-advantaged locations. The principal incentive for this increased related-party reinsurance activity has been the avoidance of U.S. income tax,” Berkley concluded. Over a period of nearly 20 years, this tax advantage has put considerable competitive pressure on domestic insurance companies to relocate to (or lines of business to be sold to companies already located in) low-tax or no-tax jurisdictions—a number of companies already have done so, either by inverting or otherwise.

Mr. Berkley added that failure to address this and begin “leveling the playing field” could further diminish the US capital base and deprive the US Treasury of billions of dollars in tax revenues from those companies.

With one of the largest US insurance companies currently having to sell off a considerable portion of its insurance assets to ensure its survival, it is essential that we act immediately to shore up the US market.

"Offshore reinsurers are already using inflammatory language to put up a smokescreen in an attempt to play on the fears of Congress and the American public by arguing that legislation will diminish the benefits that the offshore reinsurance community provides to the US but that is simply ridiculous," the Coalition said.

The bill would only apply to certain excessive non-taxed reinsurance premiums paid to affiliates with respect to US risks. It does not affect foreign reinsurers providing third party reinsurance to unaffiliated insurers. Consequently, it will have no effect on the market for catastrophe coverage that protects Americans from natural disasters or the market for crop insurance because in those cases, companies buy reinsurance from unaffiliated reinsurers. It will not cause prices to rise, nor will it prevent coastal residents from obtaining insurance to protect them from hurricanes.

The primary insurers for homeowners in the US are US based. The legislation is intelligently crafted because it levels the playing field for domestic and foreign domiciled insurers without abrogating treaties, violating non-discrimination clauses of existing treaties, negatively impacting the insurance and reinsurance markets, or impacting jobs in foreign domiciles. It does not afford any special treatment or consideration but only reduces an unfair competitive tax advantage that favors foreign-controlled insurers doing business with their affiliates at the expense of the US Treasury and to the detriment of fair competition with domestic insurers.

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