Congress recently conducted a hearing on H.R. 3424, legislation introduced by Rep. Richard Neal, D-Mass., that would deny deductions for certain reinsurance premiums paid by a foreign-owned U.S. insurer to an offshore affiliate. The legislation is a response to pressure from some U.S.-owned insurance groups that portray affiliate offshore reinsurance as a tax-avoidance strategy. These groups also argue that the tax is necessary to level the playing field and will not harm U.S. consumers.
We disagree. Affiliate reinsurance serves legitimate non-tax business purposes: it effectively mitigates the information asymmetry (adverse selection and moral hazard) between the insurers and reinsurers; and it allows risk and capital to be moved more quickly and easily within the insurance group in response to changing market conditions.