A Taxing Reinsurance Dispute

Would cutting a tax concession claimed by reinsurers help or hurt U.S. consumers?
By: | September 15, 2013 • 7 min read

The U.S. economic recovery is building up a head of steam — a development noted with some envy in Europe where growth is, at best, still anemic. Nonetheless, there is still that pesky deficit to be tackled, which means that tax-raising proposals that never gained much traction before now can still be periodically brought out and dusted off.

Prime examples are bills H.R. 2054 and S. 991, introduced this summer, respectively, by Rep. Richard Neal, D-Mass., who serves on the House Ways and Means select revenue measures subcommittee, and Sen. Bob Menendez, D-N.J., a member of the Senate Finance Committee.

Following President Obama’s budget announcement in April, which raised the possibility of ending some tax breaks commonly enjoyed by international reinsurers doing business in the United States, the duo revived proposals to legislate against U.S.-based companies that claim tax deductions for reinsurance premiums paid to foreign affiliates free from U.S. tax law.


The measure, which has been launched on previous occasions without success, has been promoted this time around as closing an “unintended tax loophole;” one that costs ordinary U.S. taxpayers billions of dollars, as well as handing an unfair advantage to foreign-owned insurers serving the U.S. domestic market over their home-based competitors.

Proponents of the bills cited a $12 billion slice from the deficit over a period of 10 years as the prospective prize if they are pushed through.

Neal has mounted a formidable assembly of facts and figures to back up his argument, such as a steady increase in the amount of reinsurance ceded by insurers to offshore affiliates, from $4 billion in 1996 to $33 billion in 2008; much of the latter figure comprising nearly $21 billion to Bermuda affiliates and over $7 billion to Swiss affiliates.

Meanwhile, Menendez has attacked “the increasing trend of foreign insurance companies moving profits made in America offshore and sticking Americans with the bill,” which he describes as “incredibly troubling.”

CDII Bangs the Drum

The main support for the legislation has, unsurprisingly, come from The Coalition for a Domestic Insurance Industry (CDII) whose slogan is: “Seeking a level playing field for all insurance companies.” The CDII’s 13 U.S.-based members include such big hitters as W. R. Berkley Corp., Chubb, Berkshire Hathaway and Liberty Mutual. Berkley Corp.’s chairman and CEO, William R. Berkley, urged Congress back in May to waste no time in adopting the legislation.

“Congress never intended to give a preference to foreign-controlled insurers over their domestic competitors,” said Berkley. “Closing unintended loopholes to recover lost revenue is one of the best ways to offset the cost of needed tax reform.

“Closing this loophole, staunching the flow of capital overseas, and restoring competitiveness for this important domestic industry is a win for us all.”

Yet the forceful language has not yet attracted mass support for the cause.

As the CDII acknowledged, the legislation has been successfully blocked over several years by what it called “scare tactics” employed by the opposition “claiming that it will adversely affect pricing and capacity in the U.S. market.”

The Federal Insurance Office (FIO) in the U.S. Treasury, set up as a result of the Dodd-Frank Act, has also not been won over by the arguments that lie behind H.R. 2054 and S. 991. This fact was noted by Randi Cigelnik, general counsel at the Property and Casualty Insurers Association of America, when she spoke recently at an insurance conference in Bermuda.

“The domestic industry is split on the [taxation] issue and the FIO is neutral,” said Cigelnik. “Some believe that it will make it more difficult for non-reinsurers to meet the U.S. market’s demand for reinsurance.”


The legislation is also opposed by organizations that stress they are “no friend of the insurance industry” and can, therefore, judge impartially on the taxation issue, such as the Florida Consumer Action Network. Its executive director, Bill Newton, said the proposed legislation would impose “punitive” tax increases on many insurers that Florida residents rely on for hurricane cover.

Newton cited a study by Massachusetts economic consulting firm the Brattle Group on the economic impact of an earlier version of the Neal-Menendez bill. It found that ending the tax concession would result in a 20 percent decrease in the net supply of reinsurance in the United States. According to the study, the impact on Florida consumers would be an overall annual increase of more than $817 million in their insurance bills. The study saw homeowners’ insurance rates rising by 4 percent and a 13 percent hike in commercial insurance rates.

“By shifting the financial burden of rebuilding after a disaster onto already strained domestic insurers and their policyholders, this tariff would disrupt insurance markets while failing to raise revenue in any significant way,” Newton concluded.

The word “protectionism” has also been used, as in a commentary by the think tank R Street Institute. Senior Fellow R. J. Lehmann wrote of the proposal: “This is a protectionist measure that serves the interests of certain large domestic companies by discouraging foreign-based competitors from devoting their capital to U.S. risks.

“It also is simply bad policy, in that it would tend to concentrate U.S. risks within the United States, rather than allowing the global reinsurance system to spread them throughout the globe.”

Back to the Beggining

Brad Kading, president and executive director at the Association of Bermuda Insurers and Reinsurers, said that other consumer groups also oppose the bill, including the European Commission; the governments of the U.K., Germany and Switzerland; former U.S. trade ambassadors; and industry bodies including the Risk Management Society (RIMS).

“The proposal to close the tax loophole has been around for the past seven years and has been part of the president’s budget for the past three,” said Kading. “However, Congress is continually looking at new ways to raise taxes, so the issue hasn’t gone away — even though six insurance regulators and Florida business groups have ‘got the message’ and are opposed to the proposals.

“Indeed the opponents’ coalition has always been much broader based than that of the proponents,” he said.

“Back in 2007, the original proposal was supported by Berkley and Chubb, against which 50 letters of opposition were submitted. So the proponents made their case long before now. However, the Senate has decided that it will go back and begin with a blank sheet of paper in redesigning the tax code and is open to all potential methods of raising revenue.

“Everything is up for grabs,” Kading said, “and this bill might always get through as a part of wider tax-raising proposals. Dave Camp, [R-Mich.], chairman of the House Committee on Ways and Means, wants to have the tax bill ready by the fall. So, theoretically, there could be a floor vote following the Committee vote.”


The external affairs committee at RIMS is also working hard on the issue, as it believes the effects of the bill would be detrimental to members, said Carolyn Snow, the committee’s board liaison member and also director of risk management for health care company Humana.

In April, RIMS wrote to the House Ways and Means Committee’s International Tax Reform Working Group, expressing its disagreement with the administration’s proposed 2014 budget, which includes a proposal to eliminate the tax deduction, as outlined in H.R. 2054 and S. 991.

In the letter, RIMS President John Phelps said the budget proposal to eliminate the tax deduction “would have a chilling effect on the use of foreign reinsurance.”

“As a result,” he wrote, “the availability of coverage would be reduced and costs for consumers would increase significantly, particularly in urban areas subject to terrorism risk and areas prone to natural disasters.”

Snow added that the bill submitted to the Senate by Menendez has, so far, had a notable lack of success in attracting co-sponsors, while that submitted by Neal had gained only one.

“However,” she said, “the U.S. has a big budget deficit and the president has talked of the measure as part of the overall deficit reduction program. So it’s true that there is the potential for it to go through attached to another bill — although quite possibly there’s no more than an outside chance of it happening.

“Nonetheless, it might be regarded as one of the ways of ‘closing the gap’ without creating too much pain, particularly if the general public regards the tax measure as something that affects only corporations. It could, in reality, increase insurance premiums significantly, with household insurance among the classes affected where the insurer cedes reinsurance offshore,” she said.

Snow added that Bermuda-based companies are quietly campaigning against the proposed measure and there is some hope that it might “die a death” naturally, given the strength of the opposition expressed on sites such as

“One positive sign is that U.S. economic growth shows signs of picking up but there is some question as to how sustainable these signs of recovery are,” she said. “The housing market is showing signs of recovery — but still the deficit remains a major issue.”

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.


Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.

R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.


We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?


Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.


Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.


More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]