A punitive law threatening to remove tax deductibility on reinsurance ceded to an offshore affiliated reinsurance vehicle looks set to increase costs for captive owners, after its inclusion in the Obama administration’s 2011 budget.
Originally dubbed the ‘Neal Bill’ because of its sponsorship by Massachusetts Representative Richard Neal, the legislation has been reintroduced to the US Congress as HR3424 and touted by a group of US domestic insurers under the auspices of WR Berkley and Berkely Group.
The law, which will remove tax deductibility on affiliated reinsurance ceded offshore, has been proposed to generate revenue to reduce the government deficit. However, it has been met by disdain by some members of the insurance industry.
“The legislators think they are plugging a loophole only available for those domestic companies that are ceding reinsurance to an affiliated reinsurance vehicle located offshore,” said Scott Clark, risk and benefit officer for Miami-Dade County Public Schools and secretary and board liaison to the external affairs committee for Risk and Insurance Management Society (RIMS).
“Our position is that while there is a certain amount of tax deductibility, in essence, any of those premium dollars ceded offshore to an affiliated reinsurer are already taxed. This is an obvious opportunity to make revenue in a way that will avoid the political limelight.”
If passed by the Obama administration, the Bill would be a clear attempt to retain premium onshore within domestic US reinsurers. However, Clark questions whether there is sufficient reinsurance capacity available onshore, especially for high catastrophe (cat) risk.
“The domestic companies that are not in favour of keeping the current situation in play failed to mention that there they do not have enough capacity to make up the capacity that requires affiliated reinsurance offshore,” said Clark.
“While these domestic firms are arguing that premium should stay onshore, they don’t have the appetite for risk that these offshore reinsurers have,” he added. “RIMS believes it will dramatically reduce capacity, especially for high cat areas, as well as increase reinsurance costs.”
While a restriction of high cat risk capacity is unlikely to trouble the majority of traditional US-owned captive vehicles domiciled onshore or offshore, affiliated captive vehicles in place to self-cede risk offshore would be sure experience a hike in costs if the law is passed.
However, it remains to be seen whether HR3424 would hinder offshore captive formation.
“You never know the ramifications of these things until they are actually put in place but once tax is applied to something that is not currently taxed there is certainly propensity for far reaching implications on people’s interest in captives,” said Clark.
