On September 26, 2007, William R. Berkley, Chairman and C.E.O. of W.R. Berkley Corporation, the ninth largest commercial insurer in the U.S., addressed the Senate Finance Committee concerning an alleged flaw in the current U.S. tax system that provides certain economic advantages to foreign property and casualty insurers domiciled in favorable tax jurisdictions, such as Bermuda.  Speaking on behalf of his company, as well as thirteen other large domestic commercial lines and financial guarantee insurers (the “Coalition”), Mr. Berkley asserted that if the current tax system is not changed to eliminate the alleged unfair economic advantage it provides foreign insurance groups, the U.S. insurance capital base will continue to migrate abroad to more “tax-friendly” countries, threatening the future of our domestic insurance industry.

The current tax law in the U.S. allows a foreign-domiciled insurer with a U.S. affiliate to avoid paying tax on its domestic underwriting and investment income by reinsuring its business with a related-party reinsurer domiciled in a more favorable tax jurisdiction, thus generating potentially greater after-tax returns than some of its U.S. competitors.  In particular, foreign insurers are able to avoid paying tax on investment income generated from loss reserves on “long-tail” lines of business, which are typically substantial in nature because such reserves are held for an extended period of time.  The Coalition contends that such transactions have already resulted in billions of dollars of lost tax revenue for the U.S. government and provided foreign insurers with a huge competitive and financial advantage over their U.S. counterparts, who must pay tax on all of the income derived from their domestic underwriting and investment activities.

The Coalition contends that if the current tax system remains unchecked, the result will be the continued migration of capital abroad, as it provides an incentive for the formation of new companies in favorable foreign tax jurisdictions, who can then simply seek to acquire U.S. companies or lines of business to reap the benefits of the U.S. tax structure.  As a result, the Coalition believes that domestic insurers will become prime take-over targets for capital-rich foreign insurance groups.

The Coalition’s proposed legislation would alter the portion of the tax law that allows deductions for reinsurance premiums ceded to certain related foreign affiliates, but maintain the tax deduction for premiums ceded to unaffiliated foreign reinsurers.

To review a transcript of Mr. Berkley’s testimony, click here.