Obama's Reinsurance Proposal Needed for Fairness, Supporters Say

Responding to a March 2 article by Kristen A. Parillo, Willard Hill, chief marketing and communications officer at financial services company MBIA Inc., says the Obama administration's proposal to limit deductions for reinsurance payments to offshore affiliates is needed to restore fairness and improve competitiveness in the industry.

Dear Editor:

The future competitiveness of the U.S. property and casualty insurance industry will suffer while offshore insurance companies continue to benefit from a gaping loophole in our tax code. Closing the loophole, as the president has called for in his budget, will restore fairness and improve competitiveness in our industry without discriminating against foreign-controlled insurers.

For decades, this loophole has allowed foreign-owned insurance companies to strip their earnings (through reinsurance transactions with foreign affiliates) into tax havens and avoid paying taxes on business in the United States. Billions in tax revenue that could be used to restart America's economic engine is being siphoned away as a result. In 2008 alone, more than $33 billion of U.S. property and casualty premiums were moved offshore.

Now, passage of important legislation introduced by Rep. Richard Neal (H.R. 3424) will put an end to it — for good. Offshore interests represented in Ms. Parillo's story claim closure of the loophole will undermine U.S. tax policy and hurt U.S. competitiveness, when the opposite is true: It will recover billions in diverted tax revenue and end a practice that for years has provided an enormous competitive advantage to foreign-based insurers.

Contrary to statements by Organization for International Investment President and CEO Nancy McLernon, H.R. 3424 is consistent with our treaty obligations because it does not "materially disadvantage" foreign groups relative to domestic insurers in writing coverage of U.S.-based risks. The Joint Committee on Taxation staff in their technical explanation of the bill confirms this view.

That said, we wholeheartedly agree with Ms. McLernon's reported interest to ensure that U.S. subsidiaries of foreign-owned groups "are treated no differently than U.S.-headquartered companies." The proposed legislation would accomplish exactly that by taxing foreign insurance company profits earned in the U.S. equally with those earned by U.S. based insurance companies. Passage of this legislation, in keeping with core American principles, will restore parity and send the message that the United States does not favor one company in the U.S. over another.

Also, contrary to Association of Bermuda Insurers and Reinsurers spokesman Brad Kading's claims, the current transfer pricing rules are insufficient to police the stripping from these reinsurance transactions. In written testimony before Congress in 2003, then-Treasury Assistant Secretary for Tax Policy Pam Olson expressed concern over the way related-party insurance could permit the shifting of income from U.S. members of a corporate group to a foreign affiliate — and how existing mechanisms for dealing with insurance transactions were insufficient to address them.

Congress attempted to strengthen the transfer pricing rules in 2004 in an effort to close the loophole, but most foreign-based groups continue to have exceptionally low effective tax rates, and the migration overseas caused by the loophole has not abated. The Joint Committee on Taxation staff has stated that "a set of definitive rules similar to the earnings stripping rules would probably have a more systematic effect on taxpayers than relying on transfer pricing principles." And Treasury states in its green book that the tax advantages of the loophole "create incentives for foreign-owned domestic insurance companies to reinsure direct insurance of U.S. risks with foreign affiliates to an extent that would not occur between unrelated parties." Industry experts have predicted that absent effective legislation, capital migration will continue to grow and other insurers will be forced to redomesticate offshore.

It is unfathomable that Congress ever intended to favor foreign-based companies over U.S. companies in writing insurance covering U.S. risks. The facts are these: Closing this loophole will have no impact on pricing and availability of insurance, it will increase U.S. competition, and it will support the 650,000-plus employees of direct insurers in the U.S. in the midst of continuing economic uncertainty.

It's time to level the playing field. It's time to pass legislation introduced by Representative Richard Neal to close this loophole, once and for all.

Sincerely,

Willard Hill
Chief Marketing and Communications Officer
MBIA Inc.