Time to close the tax haven loophole

A loophole in U.S. tax law continues to allow foreign-owned insurance companies to avoid paying billions of dollars of income tax on their U.S. business by stripping their earnings into overseas tax havens. 

As the CEOs of leading domestic insurance companies, we urge Congress to close this loophole and end the unfair and unintended competitive advantage for offshore insurers, once and for all. With federal deficits at historic levels, and having just experienced the gravest financial crisis since the Great Depression, it makes no sense to allow this shell game to continue.

Foreign-owned insurance companies operating in the U.S. can escape taxes on most of their income merely by reinsuring their U.S.-written business with an affiliate located in a low-tax or no-tax jurisdiction. In 2008 alone, these entities reinsured upwards of $33 billion in U.S. property and casualty premiums with foreign affiliates domiciled in offshore tax havens and paid but a modicum of U.S. tax on the profits from their U.S. business. During the past ten years, the U.S. government has lost tens of billions of dollars of tax revenue on more than $230 billion of premiums ceded to offshore affiliates.


To take advantage of this loophole and avoid tax on their U.S. insurance operations, several U.S. companies have “inverted” into tax havens and numerous other companies have been formed offshore. With little more than superficial activities related to their U.S. business in their offshore “headquarters,” these companies operate and transact business in the U.S. and many are traded on U.S. stock exchanges.  This movement already has resulted in significant capital migration abroad and a concomitant loss to the U.S. tax base. Absent effective legislation, industry experts have predicted that capital migration will continue to grow and other insurers will be forced to redomesticate offshore. As John Berger, CEO of offshore insurer HarborPoint Limited, recently put it, “If you’re not in one of these [offshore] domiciles, shame on you. All things being equal, the tax advantage will win over time.” It is not good public policy for our country to gradually lose regulatory control over what is in reality a U.S. domestic insurance business. Also, because U.S. insurers presently represent some 15 percent of the total municipal bond market, greater migration of capital to tax-advantaged locales could also adversely affect the market for municipal bonds.
 


Fortunately, President Obama has recognized the problem and recently called for elimination of the tax loophole in his FY 2011 budget proposal. House Select Revenue Measures Subcommittee Chairman Richard Neal (D-Mass.) and the Senate Finance Committee staff have both developed similar legislation that would effectively close the offshore tax haven loophole. We believe passage of this legislation is essential to maintain competitive balance between domestic and foreign insurers and to preserve the U.S. tax base.



Predictably, offshore insurers have strenuously fought the legislation in order to protect their competitive tax advantage. But without facts to support their opposition, they have attempted to obfuscate the real issues by claiming the legislation will adversely affect pricing and capacity in the U.S. insurance market. 



Simply put, this is false rhetoric – scare tactics designed to deflect attention from the true issue. Here are the facts: The proposed legislation expressly does not affect third-party reinsurance – arm’s length arrangements that shift a portion of an insurer’s risks to unrelated parties and add overall capacity to the market by spreading and diversifying risk among different parties. By contrast, the target of the legislation – excessive reinsurance transactions among affiliates – adds no additional capacity to the market because the risk remains within the same overall enterprise.  


Moreover, contrary to rhetoric by offshore interests, affiliate reinsurance plays little, if any, role in providing catastrophe coverage in coastal markets and thus the rates for (and the availability of) such insurance will remain unaffected by the legislation.  Association of Bermuda Insurers and Reinsurers trade group executive Brad Kading himself admitted member company profits derived from the tax advantage are “going back to shareholders,” not consumers.


Finally, contrary to the opponents’ claims, the proposed legislation is completely consistent with our tax treaties. Experts on the Joint Tax Committee staff, who are responsible for reviewing every tax treaty before adoption by the Congress, substantiate this fact.  
What this bill will do is level the economic playing field for the U.S. insurance industry and capture billions in tax revenue from companies currently profiting in the U.S.  In this time of economic uncertainty and record levels of Federal debt, our country can’t afford to subsidize foreign companies at the expense of other taxpayers.

Sincerely, 

Carl H. Lindner, III
Chairman & President
Great American Insurance Company

William R. Berkley
Chairman & Chief Executive Officer
W. R. Berkley Corporation

John J. Degnan
Vice Chairman & Chief Operating Officer
The Chubb Corporation

Bruce G. Kelley
President & Chief Executive Officer
EMC Insurance Companies

Liam E. McGee
Chairman, President & Chief Executive Officer
The Hartford Financial Services Group, Inc.

Edmund F. Kelly
Chairman, President & Chief Executive Officer
Liberty Mutual Group, Inc.

Anthony F. Markel
Vice Chairman
Markel Corporation
Jay Brown
Chief Executive Officer
MBIA Inc.

The Travelers Companies, Inc.

Stanley R. Zax
Chairman of the Board and President
Zenith Insurance Company 

Franklin (Tad) Montross, IV
Chairman and CEO
General Re Corporation