President Obama’s fiscal year 2016 budget once again contains a revenue proposal to tax certain reinsurance transactions between U.S. insurers and foreign reinsurers. The proposal would apply to a U.S. ceding company that reinsures property/casualty risks with an affiliated foreign reinsurer. Under the proposal, in general terms, a U.S. ceding company would be denied a deduction for reinsurance premiums paid to their foreign affiliate, unless the affiliate is subject to U.S. tax on the premium income. The stated rationale is that these types of transactions create an inappropriate incentive for foreign-owned U.S. ceding companies to reinsure with their foreign reinsurance affiliates, giving them substantial tax advantages over reinsurance with U.S. reinsurers.
The President has introduced this revenue proposal numerous times during his administration, and legislation containing this proposal has been introduced in Congress on several occasions. To date, the proposal has not come close to becoming law. It remains highly controversial within the insurance industry. The odds of the current Congress enacting the President’s reinsurance proposal do not appear be any greater than in years past.