Tax changes proposed by U.S. lawmakers to prevent offshore tax avoidance by reinsurers will not lead to prompt any rating revisions over the near term, according to a briefing from A.M. Best.
Under the draft legislation, “The Offshore Reinsurance Tax Fairness Act” proposed by Senator Ron Wyden, D-Ore., ranking member of the Senate Finance Committee, the insurance liabilities of a company would need to exceed 25 percent of its invested assets in order to be considered a true insurer, the Best briefing explains.
If the company fails to qualify because its liabilities are less than the 25 percent threshold, it could still be considered predominantly engaged in the business of insurance or reinsurance—depending on “facts and circumstances,” as long as it meets a 10 percent threshold.
The Best briefing, titled, “A.M. Best Comments on Proposed U.S. Tax Changes of Offshore (Re)Insurers,” states that companies would likely seek operating alternatives to ensure capital efficiency if the tax benefits for offshore companies are eliminated, without listing the possible alternatives. The briefing also makes note of the potential flexibility under the “facts and circumstances” determination. This seems to be aimed at reinsurers that may not be holding a large base of reinsurance liabilities at times when there haven’t been any large loss events, even though they are taking significant reinsured risk, Best said.
The briefing also stresses that hedge fund reinsurer are not the only offshore reinsurers that may not meet the liability test threshold from time to time, and cites an additional issue for new company formations.
Source: A.M. Best