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Reinsurance Tax Reintroduced in House and Senate

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President Barack Obama’s 2014 budget proposal, released April 10, included a provision that would eliminate the current tax deduction for reinsurance premiums. Now there is legislation that would seek to do the same thing. H.R.2054, sponsored by Congressman Richard Neal (D-MA) and Congressman Bill Pascrell (D-NJ), and S.911, sponsored by Senator Bob Menendez (D-NJ), were introduced May 20, 2013. This marks the fourth time that Rep. Neal has introduced similar legislation.

Rep. Neal believes that foreign-based insurance companies are using affiliate insurance to avoid U.S. tax on their investment income, which leads to an unfair competitive advantage over U.S-based companies. The Coalition for a Domestic Insurance Industry, which represents 13 U.S.-based insurance groups, agrees with Rep. Neal that the current system offers a competitive advantage to foreign-based companies. In a May 21, 2013 press release William R. Berkley, chairman and CEO of W.R. Berkley Corporation, stated that “closing this loophole, staunching the flow of capital overseas and restoring competitiveness for this important domestic industry is a win for all.”

Opponents of this provision were quick to express their opposition. The Coalition for Competitive Insurance Rates (CCIR), which includes the Risk and Insurance Management Society (RIMS), stated that this legislation would “decrease capacity and hike the cost of insurance while also limiting competition in the U.S. insurance marketplace.” In that same press release James Donelon, Louisiana Commissioner of Insurance, added that “this legislation would shift the financial burden of rebuilding following a disaster onto already-strained domestic insurers and their policyholders.” RIMS followed suit with its own release in opposition to the bill. Carolyn Snow, RIMS board liaison to the Society’s external affairs committee, remarked that “this short-sighted legislation fails to realize that if organizations are forced to abandon their offshore counterparts, the financial burden of catastrophic risks would fall on the government and policyholders—an alternative that could shatter this country’s economic vitality.”

Opponents of the tax are supported by a 2009 Brattle Group study of the impact this legislation would have on the reinsurance market. The Brattle Group found that enacting this legislation would reduce the supply of reinsurance in the United States by 20%, thus raising the price of primary insurance by 1.8-2.1% overall. As a result, U.S. consumers would be required to pay $10-$12 billion more per year.

Rep. Neal is no stranger to this issue. He introduced similar proposals in 2008, 2009 and 2011. Those bills failed to make it out of committee, but that doesn’t mean opponents can sleep on the issue. Many expect that tax reform could be on Congress’ agenda for 2013-2014 and the fear is that this provision is picked up as a part of that package. CCIR, its members and other opponents will continue working to educate members of Congress on the negative effects that this bill would have on the insurance industry.

Check out this video from the CCIR for an explanation of the risks associated with a reinsurance tax.

 

The New Era of Regulatory Enforcement — Comply or Go Directly to Jail

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[Each year, the best Canadian risk managers gather to discuss the state of the discipline at the RIMS Canada Conference. The 2011 incarnation is taking place this week in Ottawa so I will be reporting from here for the next few days.]

“The possibility of doing jail time is real from the board room to the warehouse floor,” said Jay Cassidy yesterday at the 2011 RIMS Canada Conference, summing up the new anti-corporate fraud stance taken by U.S. Attorney General Eric Holder in recent years. “It’s not going to be a slap on the wrist. It’s gong to be very personal. And [they] will put you in jail.”

This was the key takeaway from a Monday afternoon panel discussion at the conference, which was focusing on regulatory expansion and led by Cassidy, senior vice president at Marsh Canada. Things have changed and rules created by Dodd-Frank and the Foreign Corrupt Practices Act will have wide-ranging implications — and penalties — for any offending companies.

Another trend is that regulatory agencies are increasingly working together and employing new tools they haven’t used in the past. The SEC and Department of Justice are reaching out to the FBI, for example, for expertise and resources. They have begun wiretapping when it is deemed necessary. In all respects, the regulatory bodies are widening the scope of what they can use to investigate.

One aspect of the reform receiving a lot of coverage is new whistleblower incentives. Now, anyone who reports a company for rule-breaking may be eligible to pocket up to 30% of the sum that officials deem was ill-gotten. Even if the offense is only valued at $1 million, that’s a nice little bonus for the whistleblower. Imagine if it is $1 billion.

Given this, it’s not hard to see why more people might become tipsters for the government. And according to the panelists, the Department of Justice is now expecting to receive upwards of 30,000 tips per year.

This may not lead to more major fraud rulings, however.

“Whisteblowers have always been principles-based more than looking for some sort of monetary pay-off,” said Ashley Beales, vice president at Berkley Professional Liability. “It’s usually that they just can’t keep quiet anymore.”

The money will likely lead to more tips and perhaps the discovery of more minor violations, he said, but on the highest level, Beales doesn’t expect a new wave of huge violations to start flooding out. At least not to enough of a degree that would significantly alter the D&O market, something that is generally affected by major claims. “Significant fraud always bubbles to the top [regardless of incentives],” he said. “This volume will be more noise than substantive.”

But even if it is merely noise, that doesn’t mean companies are off the hook. “Even if it’s not a legitimate claim and the SEC comes knocking on the door … you don’t tell these people ‘Go away,'” said Laura Markovich, partner at Sedgwick. “They won’t. They’ll come back with a subpoena.”

And just dealing with false claims can run up a big bill quickly. “Lawyers are expensive,” said Cassidy, noting that this is even truer for Wall Street firms. “And New York lawyers are … well … they’re very expensive.”

In regards to increased Foreign Corrupt Practices Act enforcement, the panel said that there will be two major aspects for companies to consider: (1) anti-bribery provisions and (2) the accounting part, which will mandate the need for better internal controls.

The first factor may be especially important for Canadian companies. If they have operations in the United States (or in some cases, even if they don’t) they will be at risk of regulator action. And Cassidy cautioned that this may be difficult to navigate given the fact that Canada is increasingly becoming a resource-based economy. He mentioned that in other locations where this has been the case (Cassidy listed parts of Africa, Russia and Kazakhstan), corruption and bribes have been more typical than, say, in economies in which retail or services drive the economy. “Historically, business has been done a little differently than what we might find acceptable [in Canada],” said Cassidy.

Canada is certainly not Nigeria. The business climate and legal culture would never allow for pervasive bribery and other illegal behavior. So for those in the energy and resources sector, the obvious solution is to remain above board in all operations.

But I do image that many companies will find that, when shipping oil and coal throughout the world, staying true to your ethics — and even within the code of the law — can sometimes be easier said than done.

[Correction: this post originally listed Ashley Beales as working for Canada Berkley. It has been update to reflect the fact that the company is called Berkley Professional Liability. Apologies.]

The Top 25 Property/Casualty Insurance Writers

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No, neither Johnathan Franzen nor myself made the list. We’re talking about the companies that wrote the most business in 2010. Here’s the full list of the top 25 U.S. carriers in terms of net premiums written, according to AM Best.

1. State Farm Group—$50,808,635
2. Allstate Insurance Group—$24,796,656
3. Liberty Mutual Insurance Cos.—$21,483,996
4. Berkshire Hathaway Insurance—$21,358,316
5. Travelers Group—$20,594,458
6. American International Group—$19,687,720
7. Nationwide Group—$14,489,531
8. Progressive Insurance Group—$14,476,676
9. Farmers Insurance Group—$14,129,512
10. USAA Group—$10,679,414
11. Hartford Insurance Group—$9,688,760
12. Chubb Group of Insurance Cos.—$8,927,736
13. CNA Insurance Cos.—$6,188,618
14. American Family Insurance Group—$5,324,290
15. Allianz of America—$4,666,301
16. Auto-Owners Insurance Group—$4,485,442
17. Munich-America Holding Corp.—$4,413,834
18. Zurich Financial Services NA Group—$4,400,123
19. Erie Insurance Group—$4,019,273
20. Ace INA Group—$3,705,475
21. Transatlantic Holdings Inc. Group—$3,418,020
22. W.R. Berkley Group—$3,392,330
23. The Hanover Insurance Group Property & Casualty Cos.—$3,053,508
24. MetLife Auto & Home Group—$2,983,236
25. Cincinnati Insurance Cos.—$2,965,462

Lunch with William R. Berkley

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I was fortunate enough to attend the W. R. Berkley Corporation’s annual luncheon yesterday at the Red Eye Grill here in Midtown Manhattan. Bill Berkley, chairman and CEO of W.R. Berkley Corp., is known for not only his intelligence and success within the insurance industry, but also for his blunt remarks and honest opinions — listening to him speak is exciting and interesting.

As one would imagine, talk of the Deepwater Horizon incident and the insurance implications surrounding it emerged. Berkley, one of the many insurers of Transocean, said his company lost $5 million from the offshore accident, but that number is far from what Llyod’s, Excel and ACE lost. Berkley, however, was not upset at the relatively small chunk of change his company lost. Rather, he was excited that his firm, for the first time, was able to raise prices 40 to 50% for offshore insurance — calling the Gulf of Mexico disaster both very unfortunate and an opportunity for insurers.

I asked Mr. Berkley if he perceived the Deepwater Horizon incident as an enormous lack of risk management. He reponded:

“I don’t think it’s an enormous lack of risk management in the offshore drilling industry, no. I think it was more a lack of understanding of all the alternative things that could go wrong.”

The very definition of risk management is to identify and assess any and all risks of an operation and then work to minimize, monitor and control the probability and/or impact of unfortunate events. Maybe I’m crazy, but the Deepwater Horizon catastrophe seems like an enormous lack of risk management to me.

The topic of discussion soon turned to the topic of financial regulation, to which Berkley agrees is needed. But he also wonders what other aren’t asking:

“If all these giant financial institutions are taking on such great risks, how come they have such crummy returns? No one is asking that.”

Indeed, I have not heard anyone asking that question.

Then questions about the P/C market prices arose. He was asked why he saw prices starting to firm up and he answered:

“You can only hide from reality for a certain length of time. You’re going to see some people go broke because they’ve mispriced their business. They won’t survive through the good times, maybe not even through the first quarter of 2011.

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People are accumulating adverse reserve deficits and that will affect them soon.

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“

And when asked how he would grade the government’s involvement with AIG, Berkley confidently responded, “D,” citing that “part of the problem with government is that process becomes more important than outcome.

True words indeed from a well-respected figure in the insurance industry.

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Even if I do disagree with him about the failure of risk management in regards to the Deepwater Horizon situation, he is a wise man that has proven his knowledge of the industry with the success of his own company.