Rep. Richard Neal, D-Mass., and Sen. Bob Menendez, D-N.J., have reintroduced protectionist legislation that would raise costs for U.S. subsidiaries of foreign-based insurers and reinsurers, costs that ultimately would be passed on to consumers in the form of higher premiums and diminished property/casualty insurance capacity.

Introduced in both the House and Senate, the bills would limit the ability of U.S. subsidiaries to claim deductions for reinsurance ceded to affiliates that are based offshore. Transfers of risk between insurance affiliates is a near-universal practice among insurance groups, both to allow for the most efficient deployment of capital, and to ensure that risks are borne and reserves are housed where they are most appropriate. However, the bills would only change the tax deductibility of transfers that move risks out of the United States, while domestic-owned insurers and reinsurers would be allowed to continue to play by the existing set of rules.

This is wrong-headed on several fronts, but most notably is its effect of concentrating risks within the United States, when we should be encouraging the dispersion of insured risks throughout the global insurance and reinsurance markets.  For property risks, in particular, the United States is home to several markets — notably windstorm risks in Florida and the Gulf Coast and earthquake risks in California — that face the potential for enormous long-tailed catastrophes. Global capital is needed to make insurance in such markets available and affordable, and anything that would curtail the flow of such capital is simply bad policy.

Moreover, offshore reinsurance cessions already are subject to excise taxes, and the Internal Revenue Service is empowered to block insurance transactions that do not constitute legitimate transfers of risk or whose only purpose is “income stripping” — ostensibly the problem the legislation is intended to address.

While proponents of the legislation claim the measures would not impose new taxes, that is contradicted by their simultaneous claims that they would raise up to $12 billion in new revenues. That represents at least $12 billion in new taxes on foreign-based insurance and reinsurance providers, and their real effect would be to make higher rates charged by a handful of large domestic companies more competitive.

Lawmakers from catastrophe-exposed areas are well aware of the dangers this proposal poses for their citizens, which is the primary reason Congress has repeatedly rejected it. The danger is that, given the long-term federal budget crisis, this might look like a juicy revenue-generator. For the sake of U.S. policyholders, we hope it’s a temptation Congress continues to resist.

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