US tax bill carries nasty surprise for risk managers with global programmes

Risk managers that include US risks within their global programmes can expect higher prices and less capacity going forward because of the US reform bill that was passed by the House and Senate this week, according to a senior source in Germany. The availability and cost of reinsurance for US companies will also be directly hit by the bill, which becomes law on 1 January 2018, because of the imposition of excise tax on transactions between US reinsurers and their foreign-based affiliates. The bill has been designed to maximise US tax paid by foreign companies that currently do business in the US through group companies and then export revenue and profit back home, or to non-US group companies. The timing is bad for buyers of insurance and reinsurance in the US and across the world as the market braces itself for higher prices following the recent spate of catastrophe losses. From a primary perspective, the winners will be US insurers that write global programmes such as AIG and FM Global, those insurers that use non-related fronting companies and smaller carriers. Leading European-based insurers in the global programmes market such as Allianz Global Corporate & Specialty (AGCS), AXA Corporate Solutions and HDI will presumably have a busy Christmas period working out their strategic response to this unwelcome news. It is not clear currently how Lloyd’s will be affected because it has various trust deeds – such as the Lloyd’s American surplus lines joint asset trust fund – lodged in the US to back up policyholder claims. “This is unwelcome news for the European insurance market that covers US risks for policyholders within their global programmes. I am not sure how aware of this the market is generally, but we have consulted legal experts and our worst fears appear to be founded,” the source told Commercial Risk Europe. The German insurer explained that, based on the latest text, the US excise tax would be at a rate of 5% of turnover. If the tax is not paid before January 1, 2019 then the rate would rise to 10%. The text also expressly states that this tax cannot be counterbalanced or offset by reinsurance claims. It is neither deductible nor creditable, the text says. “This is not something that has been in the open, we have only known about this for a couple of weeks. As it stands currently it effectively kills the concept of multinational programmes for the US apart from for companies headquartered in the US, those who use an unrelated fronter and those who write less than $1bn of gross written premiums over a three-year period – it seems they will come under the radar,” the source added. One obvious way to circumvent the new rules would be to cede the risk to an unrelated party and then cede it onto the non-US insurer. But it seems highly likely that the US revenue service would immediately pounce on such an arrangement. Another potential route would be to cede the risk entirely to a captive, but this would likely lead to much higher capital charges. The root cause of these new rules, as applicable to insurance and reinsurance companies, has been a sustained effort by certain US insurers and reinsurers to prevent the export of premium, and thus taxable income, to Bermuda-based carriers that face much lower taxes and solvency capital demands. They argue that such practices put them in an unfair competitive position. It will come as little surprise to anyone that such complaints fell on open ears in the Trump administration. It will be possible for some Bermuda-based carriers to dodge the new rules if they were sharp enough to register as a US taxpayer before this year. But, on the whole, the new rules could have a big impact on the Bermuda market. The Association of Bermuda Insurers and Reinsurers (ABIR) has vocally fought this campaign in its various guises over recent years. The association has consistently argued that any effort to penalise the export of reinsurance from the US market would limit capacity, drive up costs for consumers, mark a significant U-turn in decades-long US tax policy and violate World Trade Organisation (WTO) commitments. Commenting on an earlier version of the bill, ABIR stated: “The changes proposed run contrary to decades of US tax and trade policy and conflict with existing US tax treaty obligations. They could spur retaliatory actions from other countries and possibly damage relationships with important US trading partners.” ABIR added: “Additionally, this tariff would violate World Trade Organization (WTO) commitments. One of the basic principles of the WTO is that a country cannot treat a foreign company worse than it treats its own companies; these proposals clearly single out foreign reinsurers for worse treatment than US reinsurers. Specifically, they subject foreign reinsurers – but not US reinsurers – to an arbitrary test to limit the tax deductibility of certain reinsurance premiums paid to them by their US-based affiliates. Just as foreign countries cannot protect their insurance markets for their domestic insurance companies and treat US companies unfairly, the US cannot protect the US market for domestic insurance companies and treat foreign companies unfairly. The European Union and individual countries like the United Kingdom, Switzerland and Germany have asserted that this tax would violate WTO commitments and tax treaties.”

US tax bill carries nasty surprise for risk managers with global programmes

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