Last month, Representative Richard Neal (D- Mass.) introduced H.R. 6969 in response to concerns voiced by the Coalition for Domestic Insurance Industry (the “Coalition”) alleging that favorable tax treatment for foreign insurance groups is making it increasingly difficult for U.S. insurers to compete. H.R. 6969 attempts to reduce the purported competitive advantage by altering the tax code to disallow deductions for a portion of reinsurance premiums ceded to affiliated insurance companies not subject to U.S. taxation.
Rep. Neal and the Coalition contend that current U.S. tax law allows U.S.-domiciled insurers and reinsurers to avoid paying tax on underwriting and investment income earned on U.S. risks by ceding premiums on such risks to affiliated reinsurers domiciled in foreign jurisdictions. This is because the tax code allows deductions for all reinsurance premiums paid to these affiliated reinsurers, and therefore, reduces the insurer’s U.S. taxable income. The affiliated reinsurers do not pay U.S. taxes on the investment income generated on loss reserves or profits earned from underwriting activities. Rep. Neal and the Coalition contend that this alleged tax advantage is especially significant in “long-tail” lines of business where reserves are held for extended periods of time.
H.R. 6969 seeks to increase U.S. taxes paid by U.S.-domiciled insurers and reinsurers ceding reinsurance premiums to foreign-domiciled affiliates by limiting the amount of reinsurance deductions allowable for premiums ceded in such related-party transactions. In particular, the legislation would disallow deductions for reinsurance premiums ceded to foreign-domiciled affiliates to the extent these cessions exceed the industry average of reinsurance paid to unrelated parties. The U.S. Treasury would be responsible for determining the industry average, by line of business, each calendar year. According to Rep. Neal, by limiting the deduction to the industry average the excess reinsurance premiums paid to affiliated reinsurers will remain in the purview of U.S. taxation and, thus, limit the alleged competitive advantage of foreign insurance group.
In contrast, the Coalition for Competitive Insurance Rates opposes H.R. 6969 or any other proposals aimed at increasing U.S. taxes on U.S.-domiciled insurers ceding reinsurance premiums to foreign-domiciled affiliates. The Coalition for Competitive Insurance states that U.S. affiliates of foreign-domiciled reinsurers are currently subject to U.S. income tax. Additionally, the Internal Revenue Service has enforcement powers to review affiliated insurance transactions. Furthermore, the Coalition for Competitive Insurance contends that H.R. 6969 or any similar legislation will only limit the availability and affordability of insurance.
H.R. 6969 was referred to the House Committee on Ways and Means and is awaiting review.
For a press release of Rep. Neal’s introductory remarks and a technical explanation of H.R. 6969, please click here.
For our previous report on William R. Berkley’s testimony to the Senate Finance Committee on behalf of the Coalition, please click here.