The new administration, struggling to deal with the largest deficit in over 50 years, will have to look into all sorts of ways to raise revenue and plug perceived holes.
One of those is to tax those evil offshore reinsurers who write US business but then, oh horror, reinsure it in Bermuda, one effect of which is to reduce their tax liabilities.
…[A] proposal to crack down on offshore reinsurers gained momentum in September with the introduction of House legislation by Rep. Richard Neal, D- Mass.
The Neal bill is backed by a coalition of U.S.-based insurers including the W.R. Berkeley Corp., the Chubb Corp. (CB), and the Travelers Companies (TRV).
Those companies claim that foreign-based insurers, including the ACE Group ( ACE) and XL Capital Ltd. (XL), avoid taxes on their U.S. business by reinsuring policies written in the U.S. to Bermuda-based affiliates.
“No one wants to impinge upon the free movement of capital. But we don’t want people to use the guise of risk-spreading to avoid tax,” said William R. Berkeley, Chairman and CEO of W.R. Berkely Corp.
Of course not. And if that happens to mean that WR Berkeley et al pick up a little more market share, too, well that would be incidental, though rather nice for domestic US carriers. Umm, except that this leads then back to another problem in that the industry generally believes that US carriers are uncompetitive compared to Bermudian companies, so any move to tax those offshore carriers would lead to a decline in capacity, which would in turn lead to price hikes
“Putting this tax on all U.S.-associated reinsurance products is likely to reduce the appetite of U.S.-exposed business,” said James Livett, a business process development manager with Alwen Hough Johnson Ltd. in the United Kingdom. “In a time of reducing margins and tightening of capacity in the international reinsurance market, adding an additional financial burden on reinsurers can only be detrimental to the capacity being offered by international players, as such rates for U.S.-exposed business will increase due to lack of meaningful competition.”
And presumably those increased prices for US citizens will be precisely something that the new President would rather avoid.
Which rather begs the question whether Obama has really thought through the full impact of this proposal. As Bermuda Premier, Ewart Brown, has said:
I think the Obama camp probably doesn’t have a full understanding how much Bermuda’s operation means to the US. That’s a little known component of this whole equation.”
Dr. Brown said that between 2001 and today, Bermuda-based companies had paid out $30 billion in claims for US catastrophic events and that he believed the tax haven label was “unfair” for the Island.
For a slightly less, um, measured view — or more heartfelt expression of belief, if you prefer — you might also want to consider this.
Whatever, it looks as if we may be in for some more or less radical changes to all manner of financial systems around the world. Times are set to become interesting.
Sources: CNN, and The Royal Gazette.
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