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Agreed, very timely. I love the Reinsurance segment.


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Neil Callahan

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From: Michael Andrews [mailto:mandrews@ips.edu]
Sent: Tuesday, September 14, 2010 12:05 PM
To: Thad Brown; Ronnie Mainieri; curt@ips.edu Hastings; Chris Heinz; Hunter
Biden; Devon Archer; Eric Schwerin; Neil Callahan; Rob Mitchell
Subject: Reinsurers face taxing time on premiums - FT - Regulatory tensions
between US and EU


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
<http://www.ft.com/cms/s/0/984f03a4-63f4-11df-ad7c-00144feab49a.html>
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
<http://www.ft.com/cms/s/0/dea7d3fc-2d77-11df-a262-00144feabdc0.html>
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."