A proposed U.S. policy would impose a high tax on reinsurance purchased overseas, but recent experience in Brazil suggests the proposal could come under fire as bad for consumers and the industry alike – recent experience also suggests that some insurance companies may not have entirely consistent positions with regard to these protectionist measures.
About Brazil: The government’s insurance regulator in March enacted several regulations restricting the ability of insurers to purchase reinsurance from foreign-based companies or overseas affiliates. These included Resolution 225, which requires 40 percent of all reinsurance business to be allocated to Brazilian companies. Previously, Brazilian companies had only the right of first refusal. Another measure, Resolution 232, prohibits domestic insurers and reinsurers from ceding more than 20 percent of their insurance premium to an affiliated intra-group reinsurer located abroad.
The U.S. version of this proposal has floated around in various forms for decades – most recently, it was introduced as legislation by Rep. Richard E. Neal (D-MA) in 2008 and again in 2009, and has also been included in President Obama’s FY 2011 and 2012 budgets – and would impose a significant new tax on reinsurance that foreign-owned U.S. insurance companies purchase from overseas affiliates.
Opponents to the U.S. policy argue that it would reduce the availability and affordability of insurance in U.S. markets. For example the Coalition for Competitive Insurance Rates – of which the Heartland Institute is a member – said the bill would benefit a few large domestic insurance companies but harm the industry as a whole.
Supporters, including industry group the Coalition For A Domestic Insurance Industry – which has among its members W. R. Berkley Corporation, Berkshire Hathaway Inc., The Chubb Corporation, and Liberty Mutual Group, Inc. – argue the tax would have little effect on the U.S. market and would not affect the ability of insurers to manage risk. Many domestic insurers support the bill, arguing foreign-controlled insurers have a tax advantage over their domestic competitors in attracting capital to write U.S. business.
But the Brazilian affiliates of some of these domestic insurers – like Chubb, Liberty, and W. R. Berkley Corporation – have presented the “grounding of [their] utter disagreement” with Brazil’s policy in a January 4, 2011 letter to Jorge Vieira, president of Brazilian insurance association CNSeg, arguing that the Brazil policy is discriminatory, and will reduce capacity while harming consumers.
In late April another coalition of 18 insurance groups from Europe, Asia, and the Americas urged the Brazilian government to reconsider the new reinsurance regulations. This coalition again raised objections including the measures’ restrictions on insurance and reinsurance capacity, possible harm to global investment in Brazilian insurance and reinsurance operations, increased costs for policyholders, and diminished ability of Brazil’s insurance market to provide coverage for the 2014 Brazil World Cup soccer games and the 2016 Summer Olympic Games, also to be held in Brazil. One of this coalition’s signatories is the American Insurance Association, a property-casualty insurance trade organization whose membership includes many of the companies supporting the U.S. protectionist measures.
“Even the U.S. insurers and some of their Congressional supporters that have supported the U.S. tax have opposed the Brazilian regulations,” says Bradley L. Kading, president and executive director the Association of Bermuda Insurers and Reinsurers, one of the groups opposing the protectionist policies in both the U.S. and Brazil. “We’re happy to be working with them in Brazil on this issue; we hope they will see the light on the counterproductive U.S. tax proposal someday.”