Hearing Scheduled Today on HR 3424, Reinsurance Tax Bill

HR 3424 will be the subject of a hearing House by the House Representatives Ways and Means Committee today at 10:00 a.m. The Bill, sponsored by Rep. Richard E. Neal (D-MA), has been the subject of a lengthy debate [See IJ web site – . https://www.insurancejournal.com/news/national/2010/06/29/111147.htm].

It is strongly backed by the Coalition For A Domestic Insurance Industry [www.coalitionfordomesticinsurance.com], headed by William Berkley, Chairman of Connecticut-based W.R. Berkley Corp. As explained in the announcement of the hearing, Neal’s legislation would restrict the amount that a P/C insurance company may deduct for premiums paid for reinsurance. Proponents of the legislation claim that this creates a “tax loophole,” as a number of insurers, who write coverage in the U.S., are allowed to deduct the amounts they pay to reinsurers, mainly in Bermuda, that they are affiliated with.

For a full exposition of HR 3424 go to: http://waysandmeans.house.gov/press/PRArticle.aspx?NewsID=11250 . The hearing itself will also be broadcast on the Committee’s web site.

A number of insurance companies and risk managers, including RIMS, have banded together to oppose passage of HR 3424. The Washington D.C.-based Coalition for Competitive Insurance Rates [www.keepinsuranceratescompetitve.com] charges that disallowing the reinsurance premium deduction is discriminatory, thus violating tax treaties, and would raise reinsurance rates charged to U.S. companies, and ultimately require U.S. consumers to pay more for their insurance.

The CCIR has commissioned a number of studies, aimed at providing evidence that the Neal Bill, which has been proposed off and on for the last 10 years, should be rejected. The most recent, released July 12 was prepared by the Brattle Group, as a follow-up to its original study published in 2009. It is available at: http://dl.dropbox.com/u/144702/UpdatedBrattleReport2010.pdf.

The latest report concludes that HR 3424 “would cost consumers even more than initially feared.” The study, authored by Dr. J. David Cummins, the Joseph E. Boettner Professor of Risk Management, Insurance and Financial Institutions at the Fox School of Business at Temple University and the Harry J. Loman Professor Emeritus of Insurance and Risk Management at the Wharton School at the University of Pennsylvania, and The Brattle Group’s Dr. Michael Cragg and Dr. Bin Zhou, concludes that the enactment of HR 3424 would:
— Cost consumers an additional $11 – $13 billion per year to maintain their current insurance coverage.
— Significantly weaken competition and reduce reinsurance capacity in the US by 20 percent.
— Reduce supply and increase prices disproportionately on those states most vulnerable to catastrophic losses, such as California, Florida, New York and Texas.
— Increase home insurance costs for Floridians alone by $266 million, up from the 2009 Brattle Group analysis showing a $66 million cost increase for Florida’s consumers.
— Raise home insurance costs in Texas by $112 million and by $28 million in Louisiana.
— Make it more difficult for businesses to obtain insurance.

It also warns that “disaster-prone states rely heavily on the backing of foreign-based reinsurers to protect them. For example, more than 60 percent of the claims from Hurricanes Katrina, Rita and Wilma came from foreign insurers and reinsurers. The reductions in capacity and increases in cost predicted by the Brattle Group study could leave these areas even more vulnerable than they are now.”

The hearing tomorrow may shed additional light on how much support there is for Rep. Neal’s legislation. Certainly a number of New England-based insurance companies are backing it, but, as the opponents point out, disallowing a deduction for reinsurance premium payments, which has been in place since 1986, could have a number of adverse, and expensive, consequences.

Sources: House Ways and Means Committee; Rep Richard E. Neal (web site); The Coalition for Competitive Insurance Rates; the Brattle Group