Plans to tax US reinsurance transfers overseas ‘insane’: Noonan

The plan to eradicate tax deduction for reinsurance placed with foreign reinsurers by US insurers, based on the argument that this represents an import, is “insane” according to Ed Noonan, chairman and CEO of Bermuda-based insurance and reinsurance group Validus. Mr Noonan told analysts during the group’s fourth-quarter results call that any attempts to hamper the distribution of risk into the international insurance and reinsurance sector for political reasons are “misguided” and simply “dumb” policy. The ongoing effort to crack down on the transfer of risk from US insurers to foreign-based reinsurers, often part of the same group, has received a significant boost from the election of Donald Trump to the White House. President Trump made it crystal clear that he plans to boost the US economy and generate jobs by favouring US exports and penalising imports as he took power in Washington. Mr Trump will no doubt lend a favourable ear to the arguments of politicians such as Senator Mark Warner and Representative Richard Neal, who propose to levy a punitive tax on foreign-based companies that provide reinsurance to US affiliates. There is also a separate but related proposal for a border adjustment tax. This would be applied to goods and services consumed domestically and would have a similar effect to the Neal-Warner legislation’s proposal: it would deny US subsidiaries the ability to deduct premiums ceded to their international affiliates. Bermuda and other international insurers and reinsurers argue that these efforts would backfire for US businesses and consumers. They argue that what is actually occurring is a real transfer of risk from the US to international markets, which enables the global reinsurance market to support he US economy in times of need. Mr Noonan was asked about the border adjustment tax plans and efforts by Senator Warner and Representative Neal to close the supposed tax loophole by analysts during the Validus analyst conference call late last week. He was typically bullish in his response, according to online reporting service Seeking Alpha. Mr Noonan reportedly said: “Risk is obviously being exported and it's ludicrous to say otherwise. It strikes me as the most insane argument to think that we're doing anything other than transferring risk out of the United States.” Mr Noonan said the whole border adjustment matter is a “bit of a stalking horse” when it comes to the insurance industry. He said the US insurers that have backed the efforts by Representative Neal in particular during the past decade, to try and stem the flow of premiums out of the US to destinations such as Bermuda, have got it seriously wrong. “I just love it when insurance executives forget that our business is predicated on the law of large numbers and geographic diversification. They're pursuing their narrow interests and yet, at the same time, they cloak themselves in righteousness over equalising tax rates around the world,” said Mr Noonan. The Validus CEO said that, in his view, the global insurance and reinsurance industry is structured “perfectly” to reduce the cost of risk for US businesses and consumers. “Any changes in US tax policy in that regard are only going to increase the cost of risk by localising volatility, right? That volatility is much more efficiently dealt with across the world – across the global balance sheet,” he said. Mr Noonan added that he has heard the arguments of US insurance leaders on this matter for two decades now and wanted to point out that every one of them manages their business to minimise their tax rate in every way they can. At the same time, they spend a good deal of their time “talking up” how the rest of the world enjoys a tax advantage over them. According to Mr Noonan, the argument needs some more balance to be taken seriously, especially as the US government provides significant natural catastrophe support for its national insurers such as the FEMA flood programme. “When big events happen, we don't have the benefit of a 33% quota share from the US government on claim payments. US companies have that. I think the global industry does an incredible job of spreading risk around the world and anything that changes that is just misguided and dumb policy,” said Mr Noonan. Mr Noonan is not alone in his opposition to the latest US assault on foreign reinsurers. Only two weeks ago the Coalition for Competitive Insurance Rates, the platform that says its goal is to support continued and increased competition within the US insurance industry, commended a recent study that examined the impact of the legislation introduced in Congress by Senator Warner and Representative Neal. The study was released by the Brattle Group, a leading economic consultancy, which found that, if enacted, the proposal would reduce the supply of insurance and reinsurance and drive up the cost for consumers, homeowners, and businesses. “The numbers really do speak for themselves,” said Lars Powell, one of the study’s authors and director of the Alabama Center for Insurance Information and Research. “This study reaffirms prior Brattle studies on the issue: if the US subsidiaries of foreign-based reinsurers are subject to the tax outlined in Senator Warner’s and Representative Neal’s legislation, then there will be a marked decrease in the domestic supply of insurance. This will increase costs, and homeowners and businesses throughout the country, especially those in areas that are vulnerable to catastrophes, will end up paying the price,” he said. The Brattle Group found that a ban on deduction of tax on reinsurance premiums to foreign affiliates would decrease the supply of reinsurance by 13% nationwide. This would be accompanied by an aggregate drop of $18.3bn in supply. The result would be a hike of $5bn in higher annual costs for consumers, found the study. The Brattle Group research also found that the reduction of supply in reinsurance would increase prices significantly in certain natural and man-made disaster-prone states, including Florida, New York, Louisiana and Texas. “It’s important for consumers to have solid research that accurately measures the impact of the Warner/Neal proposal, so they can let their lawmakers know what a mistake proposals like these really are,” said Bill Newton, executive director of the Florida Consumer Action Network (FCAN). “As The Brattle Group study illustrates, decreasing the supply of insurance raises consumer premiums. Florida legislators from both parties recognise how sensitive the balance is between insurance premiums and economic growth. And when consumers are spending more on insurance, they are investing less in local businesses and communities. These are serious consequences – consumers deserve better.” The Brattle group pointed out that foreign reinsurers paid nearly 50% of the estimated $19bn in losses incurred from Hurricane Sandy. They also paid an estimated 85% of privately insured crop losses resulting from the 2012 drought (approximately $1.2bn) and, in the aftermath of the 2001 terrorist attacks on New York, international insurance and reinsurance firms paid 64% of the estimated $27bn in US payouts for the claims. US insurance commissioners are also against the proposals. “This study comes at a critical time,” said Louisiana Insurance Commissioner James Donelon. “As lawmakers begin to consider reforming the tax code, they must be mindful of the sweeping effects that the proposed Neal-Warner legislation will have on homeowners, consumers and businesses if enacted. Louisiana alone will see insurance prices skyrocket more than $30m, and I am sure that my fellow insurance commissioners throughout the country, many of whom also oppose this measure, would strongly agree that this will hit nearly all Americans in the pocketbook. That isn’t something to take lightly.” The Brattle Group report also examined the effects of the proposed border adjustment on the insurance and reinsurance industry. According to The Brattle Group report, a border adjustment tax would result in a total loss ranging from $15.6bn to $69.3bn, which in turn would raise costs for consumers from $8.4bn to $37.4bn. The Brattle Group report argues that both the Warner-Neal legislation and a border adjustment tax would decrease the supply of reinsurance and widen the gap between economic losses and insured losses. The study concluded that this gap, “If not properly managed, will fall almost surely on the government as an emergency relief safety net”.

Plans to tax US reinsurance transfers overseas ‘insane’: Noonan

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