Reinsurance May Reshuffle If US Passes Int’l Tax Changes
A study published last month by a reinsurance nonprofit, the R Street Institute, warned that the tax increases being considered by Democrats and the Biden administration would raise the cost of reinsurance products for U.S. insurers, which will ultimately be passed to consumers in the form of higher premiums.
U.S. insurers depend on reinsurance companies to help mitigate the risk of catastrophic losses that might occur for their customers, said Jerry Theodorou, director of the institute’s finance, insurance and trade policy program.
Those increases will be more acute for consumers of products including homeowners’ insurance in areas in the U.S. where catastrophic events such as hurricanes and tornadoes are more likely to happen, according to the R Street study.
Certain centers for reinsurance companies, including London and other locations in Europe, already have a level of corporate tax likely to be considered sufficient under the proposed changes to the U.S. international tax regime. However, another hub for reinsurance, Bermuda, and other reinsurers in lower-taxed jurisdictions could be “hit hard,” Theodorou said.
Theodorou said the BEAT caused a number of insurance companies that had related offshore reinsurance entities to eliminate those foreign related-party payments from their reinsurance structure when the 2017 Tax Cuts and Jobs Act was passed. “After you had the BEAT and you reduced this phenomenon of ceding to related offshore entities, you had a corresponding increase in cessions to unaffiliated offshore entities,” Theodorou said.
As a remedy to the proposed changes, Theodorou said the U.S. could treat the insurance industry similarly to how those companies are treated in some European countries, where they benefit from a tax carveout afforded to financial service firms.