New Economic Analysis Refutes Opposition “Study” of Neal Bill Impact

Supposed Pricing Effects of Closing Tax Haven Loophole Based on Flawed Assumptions and Not Supported by Industry Data

WASHINGTON--()--A new economic analysis prepared by respected global insurance expert services and consulting firm LECG calls into question any purported effects of the Neal Bill (H.R. 3424) on insurance capacity and consumer pricing found by the Brattle Report commissioned by opponents to the bill. According to Christian DesRochers, FSA, MAAA Senior Managing Director at LECG, “Our analysis found significant shortcomings in the Brattle Group’s assumptions and methodology. Thus, the Brattle Report fails to make a compelling case that passage of the Neal Bill would adversely affect insurance capacity or pricing for consumers.”

The Neal Bill closes a current law loophole that costs the U.S. Treasury billions annually and provides an unfair competitive tax advantage for foreign-based insurance companies in serving the U.S. market over their domestic competitors. “The LECG analysis confirms what we already knew. The Brattle Report’s findings are highly suspect, and should not be relied upon by policymakers. Leveling the playing field by requiring foreign insurers to pay tax like their U.S. competitors should not impact pricing or capacity in the U.S.,” said William R. Berkley, Chairman and CEO of the W.R. Berkley Corporation and spokesman for The Coalition for A Domestic Insurance Industry.

Among the numerous flaws identified by LECG in the Brattle Report’s analysis are:

  • Affiliate reinsurance serves a different purpose than third party reinsurance. Affiliate reinsurance is not a substitute for third party reinsurance. In contrast to third party reinsurance, affiliate reinsurance merely moves risk from one pocket to another; it does not remove risk from the group and does not create additional underwriting capacity. This fact alone, according to the LECG Group, renders the Brattle Report analysis irrelevant.
  • Effects on use of affiliated reinsurance are exaggerated. Contrary to the conclusions of the Brattle Report, foreign-based groups are unlikely to stop using affiliate reinsurance if the Neal Bill is enacted. They merely would have to pay tax like their U.S. competitors do.
  • Any purported effects are likely to be absorbed by the market. Even if the Brattle Report were correct regarding diminished use of offshore affiliate reinsurance, it overstates the potential effect any such reduction would have on overall insurance capacity, as the market would quickly act to replace it (e.g., through other providers or capital market alternatives to reinsurance).
  • Capacity is driven by available surplus, not vice-versa. The Brattle Report wrongly assumes that written premium drives surplus, but rather it is surplus that creates overall capacity to write business. The Neal Bill will not affect available surplus. Thus, simply changing this element in the Brattle model would eliminate projected effects, as overall capacity of the industry to write business would not change.
  • Analysis is inconsistent in measuring supply of reinsurance. Although the Brattle study includes offshore affiliate reinsurance in its definition of supply, it excludes $300 billion of domestic affiliate reinsurance. This exclusion creates an inconsistency in their methodology, which causes the importance of offshore affiliate reinsurance to be drastically overstated in their analysis.
  • Unilateral price increases are unlikely. Price changes predicted by the Brattle Report in response to a presumed reduction in affiliate reinsurance are inappropriately based on an industry-wide elasticity analysis. The Neal Bill would only affect foreign-owned groups and it is difficult for them to effectuate a price increase unilaterally, given their small market share.
  • The effects of state regulation are ignored. The Brattle Report neglects to account for the impact of state regulatory policies and state-sponsored entities on the insurance market. This failure exaggerates any potential impact of the Neal Bill on capacity or pricing.

As a result of the shortcomings in the Brattle Report identified in its analysis, LECG concludes that “the Brattle Study should be viewed with a great deal of skepticism by policymakers and others when used as a basis for opposition to the Neal Bill.”

The full text of the LECG report and further information regarding the Neal Bill may be accessed at: http://www.coalitionfordomesticinsurance.com/resources/LECGBrattleCritique.pdf

The Coalition for a Domestic Insurance Industry represents thirteen U.S.-based insurance groups with more than 150,000 employees in offices located throughout the United States. Collectively, we pay billions of dollars in taxes, invest significantly in the municipal bond market, and offer millions of U.S. individuals and businesses financial protection from unpredictable risks. Please visit www.coalitionfordomesticinsurance.com for more information.

Contacts

Coalition for a Domestic Insurance Industry
Cathleen Mayrose, 212-683-0475

Contacts

Coalition for a Domestic Insurance Industry
Cathleen Mayrose, 212-683-0475