HR 3424 - Reinsurance Tax Penalty

RIMS longstanding policy opposes efforts to penalize domestic insurers with foreign affiliates by imposing limits on the tax deductibility of reinsurance premiums ceded by domestic insurers to their affiliates.  In previous congresses, Rep. Richard Neal (D-MA) has spearheaded these efforts on behalf of a few domestic insurance companies. Senate Finance Committee Chair Max Baucus (D-MT) circulated a draft similar to Rep. Neal’s bill, but it was never formally introduced.   RIMS is on record in opposition to these initiatives. RIMS is a member of the Coalition For Competitive Insurance Rates which also opposes this legislation. 

Currently, the United States tax code permits domestic insurers to manage their risk, without any penalty, by employing the practice of ceding reinsurance to their foreign affiliates. The current system fosters a healthy and competitive market for reinsurance while at the same time assuring more available and affordable property and casualty insurance. This practice is widely utilized by the industry generally and the property/casualty industry specifically, and considered an efficient mechanism to risk-pool and diversify exposure. An insurer can reduce the volatility of its losses by ceding its exposure to particular risks. A reinsurer can bear these risks more efficiently because it assumes them from a variety of sources and many of the risks (e.g., hurricanes in Florida and earthquakes in Japan) are uncorrelated. The global commercial insurance market and the consumer are beneficiaries of this practice as reinsurance allows an insurer to support more insurance, or provide a higher limit of protection, than its capital assets would otherwise allow. This makes insurance more available and affordable.

 For several years, Rep. Richard Neal (D-MA) has championed efforts to curtail the activities related to the cession of reinsurance by domestic carriers to their offshore affiliates for the ostensible reasons of protecting domestic industry which characterizes the practice of utilizing offshore affiliates for reinsurance as “tax avoidance”.  However, domestic insures or subsidiaries of foreign affiliates are subject to the same income tax laws as their Unites States based competitors. When a domestic subsidiary cedes premium and risk to a foreign affiliate, it receives a ceding commission that reflects compensation for all components of income from a ceded insurance, including investment income and that ceding commission is subject to United States tax.