Copyright 2010 A.M. Best Company, Inc.All Rights Reserved BestWire
February 2, 2010 Tuesday 04:55 PM EST
Insurers Critical of Several Obama Budget Proposals for 2011
Jesse A Hamilton
Insurance industry associations have been looking over the details of President Barack Obama’s 2011 budget proposal and not liking everything they find — from new life industry rules to taxation of major companies to potential changes for offshore insurers.
In each of the next 10 years, the administration is trying to raise an average of $1.4 billion from reforming the “treatment of insurance companies and products” — more than half of that revenue generated from expense disallowances for corporate-owned life insurance.
In fact, life insurers are worried about a number of provisions in the administration’s budget, which would still need congressional approval. The new taxes on COLI are opposed by five associations concerned with the life sector, including the Association for Advanced Life Underwriting and the American Council of Life Insurers. This product of the life business protects “against possible job loss from the death of owners or key employees” and it is also “widely used to finance and secure important employee and retiree benefits,” they said in a statement.
Jack Dolan, vice president for media relations at the ACLI, told BestWire, “It’s disappointing to see COLI in the proposed budget again. This is an issue that Congress addressed in 2006.”
Life settlements rules would also see some changes, though Dolan said his group doesn’t have a problem with them. The proposal’s explanatory language says: “Compliance is sometimes hampered by a lack of information reporting…In addition, the current law exceptions to the transfer-for-value rule may give investors the ability to structure a transaction to avoid paying tax on the profit when the insured person dies.” On benefits more than $500,000, the owner of the policy would have to report the purchase price, the buyer’s and seller’s taxpayer identification numbers and the issuer and policy number to the Internal Revenue Service, to the insurance company that issued the policy, and to the seller. Also, the proposal “would modify the transfer-for-value rule to ensure that exceptions to that rule would not apply to buyers of policies.”
Obama’s budget would, according to the industry representatives, “undercut long-standing rules regarding life insurers’ dividends-received deduction,” reducing the DRD that life insurers use “in accounts that fund variable life insurance and variable annuity contracts.”
“Any time a product’s cost increases, it becomes less accessible to consumers,” Dolan said.
And the budget proposal additionally boosts life insurer IRS reporting rules for private separate accounts, designed to counter what the proposal says is “favorable tax treatment for investing through a life insurance company.”
Only days before, the life industry had welcomed another Obama administration effort that promised to support annuities as an option for bolstering middle-class retirement security. At this stage, it is only a preview of future policy recommendations to be released later this month, but its vague language was supported by the ACLI (BestWire, Jan. 25, 2010).
On terrorism risk insurance, the proposal would cut $249 million in federal subsidies to insurance companies. That cut in subsidies under the Terrorism Risk Insurance Act won immediate industry criticism. “TRIA was reauthorized for a period of seven years as the result of a carefully negotiated compromise,” American Insurance Association spokesman Blain Rethmeier said in an e-mailed statement. “Any attempt to modify this reauthorization would have a detrimental impact on the availability and affordability of terrorism risk insurance” (BestWire, Feb. 1, 2010).
Offshore insurers have an item to note, too. In the revenue items on Obama’s proposal, one of those under “loophole closures” says that $519 million would be raised in the next decade from an effort to “disallow the deduction for excess non-taxed reinsurance premiums paid to affiliates.” The provision, which would go into effect for taxable years starting in 2011, says: “a U.S. insurance company would be denied a deduction for certain reinsurance premiums paid to affiliated foreign reinsurance companies with respect to U.S. risks insured by the insurance company or its U.S. affiliates.”
Obama has widely advocated shutting down offshore loopholes. As a candidate in 2008, he raised the issue in ads and on the campaign trail, noting an August 2007 fund-raising trip to Bermuda by his opponent, Sen. John McCain, during which an accusatory Obama ad said McCain “pledged to protect tax breaks for American corporations that hide their profits offshore” (BestWire, Oct. 27, 2008). Legislation has been introduced in this session and the last one that would shut down foreign-based companies’ ability to avoid some U.S. taxes by channeling reinsurance to sister companies located in tax havens (BestWire, July 31, 2009).
Also, from the administration-proposed “financial crisis responsibility fee,” Obama’s plan intends — in the wake of the Troubled Asset Relief Program — to raise $90 billion from major financial institutions. Though the list of affected companies isn’t certain, it’s expected to affect some of the bigger insurers.
Though the president’s plans have sent these ripples through the insurance industry, one sector is decreasingly in the headlines: health. Since Obama shifted his stated top priority from health insurance reform to job creation, health insurers have taken a step back from the political spotlight.
Hearings on the budget have already begun on Capitol Hill. In the federal budget process, the White House makes the initial pitch, and Congress must approve or rewrite that spending plan.
(Jesse A. Hamilton, Washington bureau manager: Jesse.Hamilton@ambest.com)
February 3, 2010