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I know we have discussed the political risk facing reinsurers but this
is one we have not discussed but appears to be significant. - Michael

Reinsurers face taxing time on premiums
By Paul J. Davies
Published: September 12 2010 22:23 | Last updated: September 12 2010
22:23
The insurance industry is facing political and regulatory tension
between the US and Europe that threatens to make life more difficult
for companies doing business in the US – and more costly for US
consumers.

The issues are particularly acute for the reinsurance industry and are
likely to be hotly debated at its annual gathering in Monte Carlo this
week.

First is the threat of heavier domestic taxes on reinsurance premiums
paid by US insurers to affiliated foreign reinsurers, which is aimed
at raising up to $16bn of extra revenue while cutting out perceived
tax advantages enjoyed by companies based in Bermuda, Switzerland or
other lower-tax jurisdictions.

Second is the issue of how quickly – or even whether – US insurance
regulation can gain recognition by European Union rule makers for
being sufficiently robust once Brussels’ new capital rules come into
force in two years’ time.

The issues are not yet directly linked, but each is seen as highly
protectionist by people either inside or outside of the US. If the
taxation change is enacted, the regulatory issue could become a heated
political battleground.

“There is a very real possibility that some of the things we’ve seen
here have sown the seeds of future friction between the US and
Europe,” says Howard Mills, a former New York state insurance
regulator and now chief adviser on insurance at Deloitte.

In the middle of this, large multinational insurers on both the life
and non-life sides, could face higher costs and less ability to move
capital round the world.

The taxation of foreign reinsurance premiums has already led to
protests, including strongly worded letters from the EU, and the
Swiss, German and British governments.

Alex Kaplan, a vice-president of US regulatory affairs at Swiss Re,
says the proposal in President Barack Obama’s budget is less onerous
than similar measures in a bill sponsored by Congressman Richard Neal.

The former is estimated to raise $2.3bn over 10 years, while the
latter predicts more than $16bn. “[But] both are an attack on
reinsurance and on the free movement of capital,” he says.

Peter Skinner, a member of the European Parliament’s economic affairs
committee, says the tax plans misrepresent reinsurance as being some
kind of off-shore dodgy dealings solely to avoid tax.

“I’m hopeful that the US treasury and others will see this as a
restrictive and unnecessary act,” he says.

Indeed, a hearing before the House Ways and Means Committee this
summer revealed that many in the US were against the tax, including
Floridian politicians, US tax groups and consumer representatives, who
fear higher insurance premiums for ordinary people would result.

But with a huge budget deficit and mid-term elections looming, many
fear the Democrats could try to force something through as part of a
spending bill.

Mark Watson, chief executive of Bermuda-based Argo, which has a large
US insurance business, says the reality for US insurers is that many
cannot buy enough reinsurance within the US. “The first adjustment the
industry would make [to higher taxation] is to raise its prices,” he
says.

Foreign reinsurers already face costly collateral rules on writing
contracts in the US. This came from the idea that US regulators could
not trust the supervision standards of other jurisdictions. Ironically
it is now one of the obstacles in the way of US regulations gaining
recognition, or equivalency, under the incoming European standards.

European regulators recently recommended to Brussels that both the
Bermudian and Swiss regimes be tested for equivalence ahead of other
jurisdictions, but not the US.

Sean McGovern, general counsel at Lloyd’s of London, the insurance
market, says the fear was that the US would be found non-equivalent,
which could have tricky ramifications. Big insurance groups would
likely have to hold extra capital in Europe against their US
businesses because of deficient regulation there.

“Everyone knows that there is a particularly steep climb for the US to
demonstrate equivalence because of two main issues,” Mr McGovern says.
“One, the unfair collateral rules and two, the low development of
group supervision.”

Group supervision is where one regulator – or a collaborative college
– oversees all the various operations of a large, multi-national
company. This is especially tricky in the US where each state still
has its own insurance regulator.

But Mr Mills says state regulators may begin to work together more now
that there are moves to create a Federal Insurance Office. He says: “I
think there is going to be greater efforts by the state regulators to
work from the same page and I think they will do this out of a sense
of political survival.”