Subject: Reinsurers face taxing time on premiums - FT - Regulatory tensions between US and EU
From: "Michael Andrews" <[email-masked]>
To: "Thad Brown" <[email-masked]>, "Ronnie Mainieri" <[email-masked]>, <[email-masked]>, "Chris Heinz" <[email-masked]>, "Hunter Biden" <[email-masked]>, "Devon Archer" <[email-masked]>, "Eric Schwerin" <[email-masked]>, "Neil Callahan" <[email-masked]>, "Rob Mitchell" <[email-masked]>
Date: Tue, 14 Sep 2010 12:05:29 -0400

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.”