testing testing one two three test let me call this year into water and i hope paul would take their seats i want to welcome our guest today to this hearing to discuss the taxation of related party reinsurance this hearing is to explore whether there are any actual disadvantages between domestic and foreign companies to quantify such problem if solved and to discuss proposals to address precisely that joint tax tells us that there has been a significant growth in u s premiums sent offshore for reinsurance for particularly so for those sent to related parties ten years ago when this was a mere trickle offshore mrs johnson nancy johnson and i of connecticut we had a very different legislative approach to the one i've offered in this congress now after a decade of migration offshore we are still debating the problem and how to best address it part of the problem is the complexity of taxing insurance there is no easy solution but i believe that this is a discussion worth having and as we will hear from treasury today i'm certainly open to other options in further and of this shared goal to say this issue is spawned a furious lobbying campaign would be to put it mildly you c watch the competing videos on you tube this hearing will formally air many of those views although perhaps in a less entertaining way as many of you know i've long been a crusader against tax havens i have no doubt that moving almost any industry to a tax haven would result in lower prices for goods or services produced there we need to ensure whatever we do is right for first the taxpayer and citizenry consumers and the treasury a debate about competitive corporate tax rates is one i'm ready to engage but is zero rate is a nonstarter i also believe we need a fair and open debate as has been the practice of this subcommittee and the hearings that mr de berry and i have conducted over the last year and a half i regret that seven of my invitation to invitation to the c e o s of foreign reinsurers and to the reinsurance trade groups that testified today were politely declined they instead of pointing to a report analyzing the trade aspects of the proposals that we will be discussing today although this subcommittee is concerned primarily with tax issues i will make that report and a report arguing exactly the opposite point of view on trade issues part of the record of this hearing now let me recognize my friend mr teaberry for his opening statement thank you chairman neal i believe as i know the chairman doesn't the value of this subcommittee as a place to explore study and hopefully get to the bottom of some very difficult tax issues since the issue witnesses has come up all i'll chime in as well mr chairman it's my understanding that the foreign reinsurance for me did offer another witness to the majority to try to accommodate the chairman's interest in a balanced panel it's also my understanding that the witness was ultimately not invited everyone here mr chairman is aware that this issue is very important to you and i certainly appreciate your leadership very important leadership in this matter and i'm glad that the subcommittee has been given an opportunity today to discuss it we've heard quite a bit about in general of closing loopholes in the tax code over the past year and a half and closing loopholes where they exist is very very important we also need tax policy in this country overall tax policy in this country that is competitive with the rest of the world and i know the german knows that but it also i believe is something that that i fear that we're moving further and further away from and i hope that as this discussion moves forward we can stay focused on the details i know our witnesses will provide some interesting insight on the issues presented by treasury's proposal and certainly the chairman's legislation and although there are different sides of this issue we all want fairness at the end of the day to our constituents thank you again mr chairman i love for your testimony of our witnesses tha berry let me introduce our first panel today and i want to welcome back to the subcommittee steven shay the deputy assistant treasury secretary for international tax affairs at the drudgery department we look forward to the testimony that he will offer today and we certainly want to thank you mr shape for your participation without objection any other members wishing to insert statements as part of the record may do so all written statements proposed by the witnesses will be inserted into the record as well sze you are recognized for your opening statement mr chairman ranking member to bury this english members i appreciate the opportunity to testify regarding tax issues relating to reinsurance certain features of current u s tax rules relating the reinsurance transactions among affiliates can create inappropriate and sagas to use reinsurance to shift profits out of the united states my testimony will discuss the use of reinsurance in the marketplace the particular tax policy concerns raised by reinsurance with foreign affiliates and the proposal addressing these concerns reinsurance is essentially insurance for insurance companies or insurance policy allows an insurer to obtain insurance protection from a reinsurer for all or a portion of the risk it directly ring directly insurers in exchange for the payment of a premium to the reinsurance reinsurance is widely used for a number of business reasons a direct insurer appropriately can reduce its obligation to maintain capital in reserves to cover losses to the extent reinsurers a risk as a result reinsurance with unrelated reinsurers can allow insurers to write additional business or offer higher limits to policyholders without having to raise more capital and in addition can protect insurers against catastrophic losses when used within an affiliated group of companies reinsurance does not reduce the overall risk for which the group is liable nevertheless reinsurance can be used to transfer premium sing risks within the affiliate group in order to efficiently allocate capital for regulatory and other business purposes such as allowing insurers to zero lower overall costs by pooling capital written by from insurance written by various affiliates affiliate reinsurance also may be used to lower taxes by for example shifting premium income and returns on research from higher tax to lower tax jurisdictions where all of the parties involved are u s taxpayers the premiums for reinsurance will give rise to a deduction for the insurer and corresponding income for the reinsurer and the group's overall us tax position remaining effectively unchanged thus in the purely domestic context affiliate reinsurance allows insurers to efficiently allocate capital generally with no change to their overall federal tax burden worthy affiliating reinsure is located outside the united states however the tax consequences vary significantly depending on whether the insurance group is owned by a foreign parent corporation which will refer to as a foreigner own group or a us parent corporation which all refer to as a us own group in the case of a us own group the income from both premiums and investment returns of a foreign affiliate of the us own group generally is subject to current us tax directly or under the anti deferral rules of sub par that without regard to whether the income is distributed in contrast in the case of a foreign owned group reinsurance of us risk with a foreign affiliate can result in a significant reduction in the overall u s taxation with respect to those risks while a domestic subsidiary of a foreign parent is entitle to a deduction for the reinsurance payment premiums paid to a foreign affiliate the income of a foreign affiliate from re insuring u s risks including investment income assets supporting its reserves is not subject to us income tax unless the foreign affiliate carries on business and united states the premiums may be subject to one percent excise tax unless it's waived by treating the ability of a foreign owned group to reduce or eliminate u s income tax on us risks reinsured with its foreign affiliates including the us tax on associated investment income creates a significant tax incentive for foreign owned group to use affiliate reinsurance to move income from insurance of u s risks offshore to low tax jurisdictions the obama administration's fiscal year two thousand and eleven budget proposal is designed to address me and sadness created by current u s tax rules and to level the playing field between us owned them foreign owned groups insuring us risks under the budget proposal a us insurance company would be denying adoption for certain reinsurance premiums paid to an affiliated foreign reinsurance company with respect to us risks insured by the insurance company or its u s affiliates to the extent that the premium income affinity is not subject to u s income tax and the amount of reinsurance premiums negra seating commissions paid to foreign reinsurers exceeds fifty percent of the total direct premiums received by the us insurance company and its us affiliates for a line of business a foreign affiliate reinsure that would otherwise be denying a deduction would be permitted to avoid application of the provision by electing to treat  income from the related party insurance that's subject to this allowance with respect to u s rests as effectively connecting income from u s tax purposes and subject to u s tax the budget proposal would reduce the incentive to use reinsurance to move profits offshore by reducing the u s tax benefit for doing so in cases in which the u s i'm sure enters into excessive reinsurance with foreign affiliates not subject to u s tax the administration believes it is important to level the playing field between us on the floor and on insurance companies we put forward one specific proposal to do so but remain open to other proposals to achieve this goal mr chairman we appreciate the leadership role that you senator menendez and the ways and means  finance committees have taking on this subject we look forward to working with you and other members of the subcommittee as well as the full committee on this important issue thank you for the opportunity to testify i'm happy to take any questions thank you mr sze the loophole targeted by my bill and the obama proposal is obviously not a new one in two thousand and two one of your tax policy predecessors at treasury testified before the ways and means committee expressing concern with the use of offshore related party reinsurance that several inversions were done by insurance companies to take advantage of this loophole in two thousand and four congress an act of legislation to stop the corporate expatriation prospectively only against my objections however it was i think done at the initiative that i had begun to offer across the congress and it also gave treasury additional transfer pricing in forstmann powers for offshore reinsurance why did you choose to propose this different approach rather than further tightening the existing transfer pricing rules or just increasing the excise tax thank you mr chairman we believe the approach in the budget is well targeted at the specific problem that we've identified transfer pricing it is not exclusively a transfer pricing problem it's a structural issue as well and so we think this approach is better than either president spoke poser uses an earnings stripping type approach which is the same model that i've used in my proposed legislation while your proposal is more modest and raises left revenue do you not think that the strongest opposition directed at my bill has not yet landed on yours as well i've been newspaper clip that was authored by our florida witness on the next panel and a fellow at the heartland institute a conservative think tank opposing the administration's proposal as the administration analyze the impact of this proposal on the gulf coast thank you mr chairman i agree that the two proposals take very similar approaches there are really only two differences one having and one having it basically having to do with scope and what they do or reflect just balance differences in approach to balancing between competing considerations and as i've said my test my we look forward to working with you in the committee to to refine any differences and conversation debate or discussion in any of the four hundred thirty five congressional districts across the country with any member of congress that's how important i think this issue is and with that idea to my friend mr de berry thank you mr chairman your testimony sta the administration's proposals designed to prevent foreign owned churns companies operating here from shifting their profits to affiliates abroad the administration's proposal grants a fixed safe harbor of fifty percent permitting deductions for foreign reinsurance premiums under the threshold however my understanding is that domestic re and domestic insurance companies also reinsure with affiliated companies as your testimony acknowledges companies have strong business reasons to reinsure with affiliates whether foreign or domestic to be fair shouldn't your proposal take the percentage of premiums that domestic companies american domestic companies reinsure with their affiliates and use that figure as a safe harbor for foreign owned american companies thank you mr king a very the affiliate reinsurance within the u s group as i've indicated testimony is different than the affiliated reinsurance at least in most cases with respect to the farming and gropes in that the premium in this income is going to be taxed under the us tax system that's just not true in the other case so i don't view that august being the most appropriate benchmark for that reason that's in a sense exactly what we're what we're trying to address is the fact that there is a potential advantage in the premium not being taxed and we're trying to address i could manage in cases where it's perceived to be excessive and we have chosen a benchmark has i've indicated as to which people might take a different approach but we've chosen a benchmark that we feel identified a successor reinsurance and we're happy to have further discussion about what the best approach is for such a benchmark or even whether there's an alternative approach that would target the a level playing field jack that i think we all share in some better way putting aside the question of whether the proposals that we're discussing today would be consistent with our obligations under the world trade organization can you tell us whether the administration is concerned that a number of foreign governments including some of our allies have voiced their opposition to the treasury proposal discussions with foreign governments with respect to the proposal we've explained the rationale we've explained our views with respect to why our proposal is consistent with tre s and we welcome the views of other governments on any international tax proposal that we have i think i've come from very comfortable saying that we feel our proposal is appropriate and we've had an open august exchange of views thank you last question i come from central ohio the issue of jobs and economy is first and foremost on people's mind when i'm out not going on doors i hear it over and over and over again this issue obviously crosses a lot of different spectrums with respect to employment and ohio is a perfect example we have companies american companies that employ lots of people who support the chairman's proposal we have american companies foreign owned american companies in ohio that don't support the ministrations proposal employees and all and ohio as well as he'd ministration done any sort of analysis on how many jobs would be impacted by your proposal either jobs that would be potentially lost in america or jobs potentially would be gained in america thank you for that question as i've indicated have you our proposal as fundamentally an anti abuse proposal and the objective is to level the playing field let nobody mistake the fact that we want all businesses that are operating in the united states  treated fairly and on a level playing field basis so this is not about notwithstanding the structural issue that i think we're trying to cope with is not about either from favoring or disfavoring either domestic or foreign insurers we're trying to achieve a level playing field but we don't know in terms of i guess what you're saying is you don't know how many jobs potentially would be either lost or created i think i think jobs are best addressed by a tax system that that's treats tax payers an equivalent way therefore economic decisions are least disturbed and that way we have the most efficient and productive economy ok thank you mister thank you very let the journal recognize the gentleman from oregon the dynamics behind this i appreciate what you're saying that you don't want to necessarily subsidize a job here or a job there unnecessarily by unequal catch treatment but you're if i understand correctly you're saying if you level the playing field everybody operates the same then it shouldn't necessarily have a dramatic increase one way or another people will be allocating capital in ways that makes the most sense for business purposes and that we're not having the tax benefits that maybe benefit one class of operators as opposed to another and we're going to hear some testimony that suggests that this could be a ten billion dollars or twelve billion dollars tax increase because of the benefit that is flowing now that you're seeking to close  am i'm curious if you have any sense that the amount of money that is involved here can you do you have do you are you confident comfortable with the  estimated mr neil's proposal so it depends on which one you're talking about but let's let's take on the substance of your question without getting into the specific of flying numbers but i'm just in terms of order of magnitude  here i believe the joint committee estimated our proposal somewhat at two point roughly two point three billion around two point two two point three billion i am curious if that whatever the order of magnitude that that will actually translate into a change in this country about premiums that people make or the extent of coverage is there any evidence that suggests that if capital is allocated more rationally based on a level playing field that that is going to have a material effect on on the insurance that is available the scope of coverage  busa proposal i think that you know the numbers you're talking about are in the context of quite a large insurance market it's going to have differential impact it will flow through the overall system and with all due respect to my economist friends who are always right i'm sure but recent experience suggests that that's a little hard to call this that we're down to level s i think it's pretty pretty hard to predict with accuracy on any particular geography line of business exactly what a relatively targeted proposal would have been i think in my own view is that that is outweighed by the importance of the objective and the importance of the policies that these this proposal represents thank you mr chairman thank you very much mr bloom an hour and about fourteen percent will this bill create jobs and stand about what the administration proposal and i would argue that any proposal that represents good tax policy that represents an effort to allow tax perry tax payers to carry on their business without having skewed tax  in analysis one analysis that i see here the minimum annual cost increase of consumers in the state of that is forty four million dollars in premium increases will that create or destroy jobs  i'm not going to comment on that analysis it there you have to make a lot of assumptions to get to that kind of a conclusion with respect to a particular geography with respect to the lines of business and the lines of insurance used in that particular geography let me just say with all due respect to whoever offered the analysis i think skepticism should be brought to that degree of of certainty at least as it's expressed with respect to the outcome of a proposal that is as complicated as this one thank you let me ask you no question do you believe this bill is all about equable tax treatment or  raising revenue in the administration's proposal is designed to achieve equitable tax treatment and i think we've been very clear about that and  to achieve a level playing field know state of connecticut is home to many insurance companies including companies on both sides of this issue so as you can understand i'm working hard to make sure we get to the root of the issue as is the case in any situation like this there are good actors i'm bad actors in our job is to stop the bad actors without punishing the good ones in your opinion does the current tax treatment of foreign affiliated reinsurance create a competitive companies i as i've said my testimony i don't think the current law the current law creates incentives that allow foreign owned companies  to engage in offshore reinsurance and when it is above a threshold i think we think of as excessive then to that extent there is an advantage with respect to the domestic o percent what accounts for this surge in the premiums to offshore affiliated entities can this growth in foreign affiliated reinsurance be attributed to a desire to avoid u s taxes  the and that's that visibility is not great but i think it's enough to suggest that the us own groups are are a smaller portion of that so just a as a matter of  clarity on that point and we also don't know specifically what the exact reasons are for that growth in premiums as my ten testimony has indicated there are in tax certainly is one of the reasons that one would infer contribute almost without doubt the some portion of that well can i ask you do you believe that the administration proposal and the reinsurance and i think i'm comfortable that the administration proposal in this is accomplishing that but i as i've indicated  to mr heller thank you and i thank the gentleman for yielding i want to get back to back to the jobs issue on this i guess i will disappointed to have a piece of legislation of this magnitude which to which i think there are some issues in front of us that there's not a jobs analysis that is done on a piece of legislation like this do you think it's out of hand or out of line to ask for analysis from the treasury department is the impact of the jobs it would have in america  maybe in different states it effects more than others as to whether or not you can increase premiums like in the state of that about forty four million dollars the potential of increasing premiums as i indicated befor mr heller i think you're getting that gets into a realm of fine tuned analysis to the point that may go beyond what can realistically be achieved a a state by state level with respect it would have to break down every single line of insurance to be to be appropriate and i question whether that august the best use of resources but so you're saying it is out of line to ask for a what's more important cap and trade or jobs eighty percent of them will tell you jobs are more important to go to my district and ask them what's more important financial we're jobs eighty percent tell you the jobs are more important and you take this piece of legislation yes and what's more important jobs are present law analysis relating to the tax treatment of reinsurance transactions between a filleted and at ease a guarantee that a percent of jobs are more important so why can't we get analysis on the impact this bill will have a jobs in this country  heller i know you wouldn't mean to infer that the obama administration does not have as its everyday focus how we can best improve job creation in the united states i am raising that question and we i think that this that's reflected in the overall policy says this administration and i think me administration's budget proposal in this regard is consistent with that  chairman is going to yield to mr bowman our just want to follow up on this line of inquiry if just assuming for a moment that there would be an increase that some would would  y it would seem to me that there would be offsetting benefits to people who to this point are competing domestic companies that are competing with people that don't have this advantage now wouldn't it if the gentleman from nevada is correct isn't there an offsetting disadvantage for people who are having to swim upstream to this forty four million dollar simming you can pick this out of the air in a multi billion dollar environment which is a leap and i think you've appropriately said that this is very hard to get down to be this fine grain but as sumi for a moment that that is an appropriate number for sake of argument isn't that an expression of the disadvantage to people who are domestically owned that they're having to compete against wouldn't that have a job consequence mr bowman r i don't disagree with the way it with with that observation framed the way you framed it however i think the difficulty with all of this is and it goes back to my response to mr heller the outcome of any tax proposal in addition to the complexities i've already mentioned is going to depend on how the market supply and demand as congress respond to these changes which in the context of the size of the reinsurance market we're talking about under any of the proposals we're talking about  cost and not have it embedded in other rates that they that they charge and that means that domestic american owned insurers are at a competitive disadvantage in nevada in oregon and so i i think that it's a bit of a stretch and i appreciate in your response to my original inquiry just sort of getting the context but i think that the notion that somehow that a foreign owned subsidiary has this advantage and it's going to cost more money that that translates into a net negative i think is a bit of a stretch i think there is a notion about equity in the markets and that that the advantage that we give to some foreign competitors actually has some disadvantage to american companies i like the notion of moving beyond that however and treating everybody equally so that we're not subsidizing some with tax treatment not available to american owned so we get past that i think that's why this was proposed by both the bush administration and the obama administration i wish that we had acted on it sooner and i hope that we will a reclaiming my time for just a second mr chairman in reference to mr heller's statement about concern his concerns about job losses if changes in the policy were enacted do you know if there's any evidence that the pro current policy has resulted in substantial job gain in that industry domestically yours if we're going talking about the threat to job losses what's the current situation are you aware of whether this industry has been a net as experienced a net increase or decrease decision in one part of the market sector one part of a supply chain can have a profound impact on other parts of the supply chain for example in the auto industry there was a misunderstanding i think with some folks not realizing that countries all over the world are linked together and making cars under under american brand and the concern i guess the question i have here is looking at the secondary and tertiary effects of a decision like this that may in fact have an adverse impact on premiums across the board and i guess the question you add allies the impact the administration's proposal on consumers i'm assuming have you looking at could you talk to us a little bit about the consumer impact on this and you know for example how much could kentucky and expect there to see in their insurance premiums change the result of this you know as i indicated in previous responses  reinsure a wide range we're talking about property and casualty reinsurance let's first start with that observation secondly there are many different lines of property and casualty reinsurance some of which affect principal on their characteristics and how the policies are written and that in this point i was making before is the we are targeting excess reinsurance is using a broad base and it's targeting those lines of reinsurance we're in a particular case of a remake of a directing shore group all the way back to the different lines of insurance to the which lines affect consumers more than others as opposed to businesses dispatch where your question is going that is a level of that is greater than the nature of the proposal really warrants in terms of getting meaningful information if you think it would be helpful to us having seen the impact for example not directly related but sarbanes oxley had many unintended consequences of causing capital flight a driving overhead and compliance costs up with businesses that were never expected when that legislation was run through the congress and i guess the concern i is some data might be helpful to understand both the consumer and business in fact any business impact is passed to consumers anyway and let me just say we have those kinds of considerations are at the forefront of our concerns when we think about proposals and the facts of policies we have been visited by both sides on this issue we welcome that we have received a guy from both sides and what i am what i can say is having tried to when you try and pressing analysis to be more granular than the data itself can support you do not get meaningful answers and i that's the thrust of my response to a number of the comments here about the utility of trying to respond to some of the questions that are seeking a level of granularity that i believe would be well beyond what the data could support meaningful analysis we would appreciate some data if possible and i think of decisions that were well intended that had other consequences ranging from foreign policy ventures through economics and energy that could have very adverse impact on various constituencies and you know this could certainly be a minor one from an underpinning so we'd like to work with you if you commit to do that to provide at least some order of magnitude data in some sample areas for consumers on where this would be if you would do that thank you mr davis let me especially for smaller companies and as you know we have a pretty diverse economy on the gulf coast maritime oil and gas and so forth some of these companies are small some are very large enterprises and the insurance commissioners from the states along the gulf coast have warned that raising taxes on reinsurers could have a dramatic in price or impact on prices for consumers of those products and we're already seeing those price pressures now given hurricanes of the oil spill and so forth do you believe it's possible that such tax increases might result in american families and businesses having to pay higher insurance premiums or actually receive less insurance coverage first of all we wish the best for all of your constituents going that the the particular markets you're identifying may be facing different supply demand characteristics frankly in the context of that those kinds of events with the question of what the impact would be of this particular tax issue trying to separate out from those other items that you've identified as i indicated earlier in comment to mr bloom in our will depend on the supply demand characteristics first of reinsurance and then of other potential direct insurance in that marketplace where depending on all the factors affecting price basically have some supply and demand will end up affecting a price but  demand and at some level is going to effect either price or if supply is reduced to increase prices that's no disagreement with about that how that will play out in any particular context is a much more complicated question and mr shelley as i listen to some of the comments on both sides talking about jobs and basically what we're in effect talking about is american competitiveness if we're going to get our economy going again and you know your comments about level the playing field and equitable tax treatment i started thinking as you were saying this as i listen to other comments that we're looking at this in two narrow a way i mean we're looking at it sort of in a box with you know u s companies versus those with foreign so those that have subsidiaries in the us foreign companies with u s subsidiaries but the whole issue of american competitiveness is much bigger than this and i fail to understand the logic behind the administration's approach to this why would we consider lowering corporate tax rates and we have the second highest corporate tax rate the world soon to be the highest depending on what japan does and yet our tax code is making us less competitive and some of the some of the budget proposals that the administration has laid forth including your approach mr neil's approach seem to me to be working counter to what  take to really of promote american competitiveness across the board and level the playing field not only in the insurance arena but for all american businesses thank you for that comment  and the let me just observe that with respect to this particular area any of the changes that we make you could independently of that lower increase do what you want with the rate that the difficult problem we're struggling with here and as to which we're trying to achieve a better solution is that balance we want business is carried on in the united states insurance of us rest to be subject to the same treatment irrespective the same fundamental tax human irrespective of whether you happen before known to us all that's a structural problem or issue that we're trying to address and our objective is to get that right if we get that right then the issues you're raising and depending on one's point of view if you think race should be higher or lower or whatever then it's on top of a better base i i think that's the  hoc approach sort of piecemeal where we create adverse consequences in other areas such as increasing insurance rates for maritime whaling gas exploration and other industries along the gulf coast in particular in my case that have to deal with significant risk and so that's why i'm thinking perhaps we should look at this in a narrow view but in a broader context and as we look at it as we look at tinkering with the tax code shouldn't be tinkering maybe we ought to have a more co legitimate to debate whether or not america's corporate tax rate is too high and as to how that applies to put it in this across the globe i think the discussion that i'm trying to focus here today is the fact that america has a corporate tax rate there are many jurisdictions across the country that have corporate tax rates the center of this discussion is with the jurisdiction that does not utilize a corporate tax rate and i think that's what we're about to hear from the next panel and i agree with you entirely that that conversation ought to take place and it ought to take place not based upon what might constitute higher taxes or lower taxes it ought to take place based upon what might improve the quality of life for all members of the american family with that let me thank you m jersey next we will welcome william r berkeley the chairman and c e o of the w r berkley corporation of greenwich connecticut and yes these are individuals who have created tens of thousands of jobs in america and finally we're going to have a chance to hear from mr shawn michaels shaw the insurance commissioner advocate of tallahassee florida now with that let me recognize mr pascal to introduce his home state constituents thank you mr chairman mr chairman i've always wondered why  what the reason was when you look at the united states tax code and why it favors foreign insurers operating united states over similar e situated john that the degen family is one of the great families of the state of new jersey his service to the folks in the jury he is not only in the private sector but also in the public sector he served as attorney general under governor byrne probably one of the most distinguished jurists we've had in the state of new jersey and i say that without blowing smoke i mean you know i say what i mean we are honored to have him here he moved into the job and sun and i believe in one nine hundred ninety correct me if i'm  served as a senior vice president and general counsel for the insurance company and he became managing director and soon after he was elected president of the chubb corporation and  and since two thousand and five john a service chief administrative officer and and chief ethics and legal compliance officer and in two thousand and eight became the vice chair chief operating officer of the c he helped steer the corporation to its current position as the eleventh largest property and casualty in sure in the world with offices in twenty nine countries in over fourteen billion dollars in revenue i you congressman for that overly generous introduction the congressman and i went back in the old days serving around the legislature in new jersey and we're grateful in the state for his service there and in congress thank you sir chairman neal ranking member teaberry and members of the sub as congressman pascrell told you and i won't elaborate on john degnan i'm now vice chairman and chief operating officer of the child corporation which is based in warren new jersey but i'm testifying this morning on behalf of a coalition of u s based insurers representing one hundred  fifty thousand employees and one trillion dollars in assets with offices employees and policyholders throughout the united states mr chairman we appeared today in strong support of age or thirty four twenty four it reflects a fundamental principle the u s tax code should treat foreign insurers and u s insurers the same when underwriting u s insurance business it's unthinkable i believe if congress were asked today whether to pass a seventeen billion dollars subsidy to allow foreign owned insurance companies to compete on fairly against u s domestic companies the congress would adopt that but unfortunately the current code allows foreign insurers to avoid us income tax and effectively enjoy over a ten year period as the joint committee has scored it a seventeen billion dollar advantage your bill mr chairman is designed simply to cure this unfairness by treating foreign and domestic competitors equally the bill would do so by closing what we believe was an on intended loophole in the code which allows foreign insurers to strip much of their u s underwriting and investment income out of the united states and into overseas tax havens literally with a simple keystroke they're able to avoid us income tax by we ensuring their u s business written on sure in our country with their own foreign affiliates an ever growing portion of the u s tax base has been hemorrhag representative treasury described this morning experience and the joint committee analysis demonstrate the transfer pricing rules simply can't stop the abuse but your bill will mr chairman the unfair competitive advantage provided by that loophole for foreign insurers is made clear in comparing before and after tax return on equity figures between bermuda based insurance companies and u s based companies the differential is insignificant based on tax for a music company but is very significant for a u s based company like ours in addition to recapturing that seventeen billion dollars in tax revenues over ten years and leveling the competitive playing field closing this loophole will have other beneficial consequences for example we believe it will be solved in an increase demanded municipal bonds the domestic u s p and c industry is the largest group investing in state and local tax exempt bonds today foreign insurers don't do so because they can avoid income tax under this loophole in the u anyway it's a loophole were closed the market for municipal bonds would likely enjoy significant growth because your bill mr chairman simply levels the playing field and results in treating u s and foreign juries doing business in this country on similar terms is treaty compliant and it doesn't violate the gaps agreement we don't believe that u s companies should have joy and advantage here in the united states over our foreign competitors will compete with them and will win but nor should our foreign competitors be advantaged over us in our own country gats international treaties in your bill all support the same underlying public policy equal treatment under the tax code finally contrary to our opponent's assertions your legislation mr chairman will not adversely affect either come passed city in the united states or consumer prices affiliate reinsurance used to shift premiums from u reinsurance nor is this loophole being used to benefit consumers a spokesperson for these foreign companies has said publicly that the advantage they have from not paying taxes is not used to lower consumer prices it's used to increase their profits and their returns to their shareholders rather that's the way they view the impact of this avoidance of tax and closing chairman neil we want to commend you and your staff for your leadership and efforts over a long period of time to close this loophole as i said in the beginning i don't believe that congress as such as this would ever deliberately legislate a loophole allowing a competitive advantage to foreign companies over u s companies your bill will amend the law to avoid that we felt and to make the law what it always eighteen without i'd like to recognize mr berkeley who knows a thing or two about job creation thank you thank you mr chairman ranking member teaberry and members of the subcommittee i'm pleased to appear before you today to discuss a serious problem in our current tax system a problem the provides a significant competitive advantage to certain foreign domo style property casualty insurance companies that reinsure their us business to affiliates and no tax or low tax countries this is one of the most important issues faced by my company since i founded more than forty years ago i'm presently chairman and chief executive officer of w r berkley corporation one of the country's largest commercial lines property casualty insurance providers i have been actively involved in the day to day operations of the company for my entire adult life some might say a teen was barely adult property casualty insurance plays a key role in the financial infrastructure that we we all have been so focused on over the past eighteen months it's a critical part of the financial framework that allows american business to prosper it is important that we continue to have a vibrant domestic and insurance industry one of our subsidiaries signet star was a founding member of the reinsurance association of america in the mid one nine hundred seventy s there's only one remaining us stoma silent member of this organization as the entire reinsurance industry has relocated offshore because the economics are so overwhelming other parts of the insurance business are currently filing suit because of the affiliated reinsurance loophole and we're not careful we risk losing the entire u s insurance industry over time the opposition is arguing vigorously to maintain their tax advantage these companies have structured their business to minimize packs burdens and maximize profits for shareholders there's nothing wrong with that objective and if things aren't changed more u s companies were reluctant we need to consider doing the same the opponents have however twisted the facts and obscured the real issue which is their desire not to pay tax this is nothing to do with unfairly taxing foreign insurers nor is it related to transfer pricing the reinsurance either to related parties is significantly greater than and is different in its nature and purpose to the reinsurance ceded to third parties the solution proposed in h r thirty four twenty four addresses the problem directly without violating treaties or trade agreements and without impeding company's ability to spread risk or manage their capital this is not a new tax it merely closes a loophole that currently allows foreign control groups to strip their underwriting if it's an investment income from u s business overseas it does not treat them any worse than u s companies in fact they can elect to have their same tax treatment as u s compan for this and other reasons it is consistent with our tax treaty and our trade obligations the opposition has spent a lot of time talking about capacity and can comment in increases in prices none of what is proposed by this legislation should impact either pricing or capacity and it is disingenuous to suggest that imposing reasonable limits on their tax advantage will drive them out of the largest most profitable insurance market in the world somehow we and other u s based competitors have managed to remain profitable while paying u s taxes on our business they will too this is not a business lacking capacity today the industry has plenty of capacity in addition the industry responds quickly to capital raising needs and capital markets have become an increasingly important participant in the insurance market this is about doing what is right for the american insurance industry and the american public it is simply about fairness and a leveling the playing field between foreign owned and domestically owned insurers who write direct business in the u s if i write direct business in the u s and reinsur not suggesting anyone should be treated differently we simply believe that if you write business in the us on the same basis you should pay tax on the same basis the us tax code should not favor f am the insurance consumer advocate for the state of florida a position that was codified by the florida legislature in one thousand nine hundred two my role is to represent the interests of the eighteen and a half million citizens of florida on insurance issues doing research seeking public input analyzing legislative proposals and assisting consumers i report directly to the chief financial officer of the state of florida thank you for the invitation to appear before you this morning to offer remarks in opposition to h r thirty four twenty four and a similar provision contained in the obama administration's fiscal year two thousand and eleven budget as i've stated my job is to advocate for florida insurance consumers that is why i'm here today opposing the imposition of any extra tax on international reinsurers there's a famous proverb that says when elephants fight the grass gets trampled this issue has been presented as a battle between some u s companies on one side and the international reinsurers on the other side frankly i don't care about the elephants on either side i'm concerned about american consumers consumers can expect to pay an additional eleven billion to thirteen billion dollars more every year because of this tax increase that would be a bad idea even in the best of times and that's a terrible idea and now in the midst of a serious recession and a disastrous oil spill especially in hard times international insurers and reinsurers are indispensable for high risk states such as florida and for a heavily populated highly industrialized and increasingly vulnerable nation such as the united states to put it plainly reinsurance is backup insurance the worldwide network of foreign and domestic reinsurers florida and the entire us spread our risks around the widest possible area this pulls the hazards of hurricanes in florida with the risks of earthquakes and san francisco terror attacks in new york city and when storms in europe the u s accounted for seventy six percent of world wide insured catastrophic losses in two thousand and eight to cover these losses u s companies purchased approximately half of all their one hundred billion dollars in reinsurance from foreign reinsurance overseas insurers u s affiliates right fourteen percent of the home and property insurance in the gulf and atlantic states these insurers provide eleven percent of home insurance and forty percent of business property insurance in the state of florida international insurers and reinsurers are particularly important in the difficult times that followed natural and manmade disasters according to available public data there are only six domestic insurance companies among the twenty nine insurers who have reported losses from the oil rig explosion in the gulf of mexico with hurricanes katrina and rita in two thousand and five more than sixty percent of the fifty nine billion dollars in payments came from foreign insurers and reinsur quite simply if you choose to impose a punitive tax on insurance consumers will have less insurance and they'll pay more for the boston based economic consulting firm the brattle group and dr david cummins of the wharton school of business have forecasted what this tax increase would mean for consumers the total supply reinsurance would decline by about twenty percent floridians would pay in excess of eight hundred million dollars per year in additional insurance costs including two hundred sixty six million dollars for more to ensure their homes and two hundred  sixty four million dollars per year more to ensure their commercial properties including condominiums and florida more business would flow into our already troubled citizens property insurance corp more demands will be placed on the taxpayer subsidized florida hurricane catastrophe fund other states would suffer similar challenges that's why more than one hundred twenty opponents of h r thirty four twenty four and similar measures have written to congress emphatically expressing their disagreement these opponents many of whom agree on little else include state legislators and other public officials from both sides consumer advocates leaders of the insurance industry and the business community the insurance commissioners and louisiana mississippi north carolina and south carolina all oppose this tax increase these insurance regulators protect the public because they are responsible for approving affiliated reinsurance transactions they understand that the purpose of these transactions is insurance risk management they know that on average domestic reinsurers use affiliated reinsurance to the same degree or more than borne insurers leading consumer organizations including the florida consumer action network the consumer federation of the southeast and the risk insurance management society rems also oppose this tax increase so as a leading member of around the miami dade county school district serving almost four hundred thousand students nor do the best insurance companies march in lockstep behind the handful of companies that support this bill the florida insurance council which represents two hundred insurers and insurance groups states and i quote our member companies as well as insurers throughout the country depend upon reinsurance programs that are reasonably priced to help make insurance affordable these tax policies would increase costs that must ultimately be passed on to florida families these companies consumers and public officials are the real stakeholders in this issue it's my understanding to make look mr berkley's company has no direct written premiums in florida for homo type peril insurance and only eight hundred forty two thousand dollars for a commercial multi that is less than one tenth of one percent of the total premiums in the state of florida on behalf of the consumers in florida and all across america i ask you to reject this tax by recognizing that it will do nothing more than increase the pricing power of a handful of large and already hugely profitable insurers who want to put a crimp on their competitors consumers need more competition not higher rates at a time when unemployment is near ten percent throughout the nation and they're twelve percent in the state of florida let's not impose another burden on working families and small businesses we're going to protect anyone let's protect american consumers the elephants can take care of themselves thank you mr chair for the opportunity speak on behalf of those who are at risk of being trampled i'd like to submit my testimony for the record include a number of supporting documents to my testimony as an asus thank you missed shot which berkeley i appreciate that you included several quotes from bermuda executives about the tax advantage since we could not get any to comment share their views today let me specifically ask you about florida since we seem to have some differing facts in front of us your testimony started to cite a study which uses data from s n l financial an independent market analysis service and i have a chart using the data from s c database which shows that amongst the top twenty insurers of homeowners multiple peril that we are hearing will certainly impact consumers most directly that that amount offered to offshore related parties is zero point three percent that is less than one percent so if for it companies have such a minor presence in florida homeowners market directly why are their proposals impacting related party insurance so controversial fundamentally i think that they're they're not really there the whole brattle report the whole issue of related party reinsurers has been taken out of context i don't think it really will have much impact at all on florida homeowners or in fact on the florida market the the florida market first of all is is unique in its own homeowners problem and  fact the my members of our coalition right twenty percent of the durance in the florida market over six point eight billion dollars of members of our coalition write business in florida so i think that  this is a lot to do about not much to the farm insurers i think using this to stir up people's fears and concerns over coastal  states the fact is it's an arm's length market it's competition that sets the price it isn't cost to set the price a great example would be in the past three years average commercial lines insurance prices are down twelve percent and our largest single cost factor which is medical costs have gone up more than fifteen percent costs don't drive the prices we charge for insurance and spite of what the brattle report said about the small tax increase competition drives the cost of what we charge mr degnan steven br book after detailing what happened in the moments and days immediately following september eleventh he writes about the president's decision to call the attack an act of war even though the white house knew of the insurance ramifications of doing cells that the companies then deny coverage he writes of the conversation around that board room in new jersey a child's head quarters can you explain how a child came to their decision about the attacks and what impact that decision had on the industry is determined i presided over the roughly thirty six hour meeting that took place at child on september eleventh and september twelfth most u s primary commercial policies have acts of war exclusions because it's not an underwriting will risk we don't pay losses that result from an act of war treaties for reinsurance is that we to spread out risk also have acts of war or exclusion so the threshold question we had to decide was whether we should den coverage for what we knew was going to be a huge loss for job it turned out to be a three and a half billion dollar loss about two point six billion dollars of which was reinsured if we were to pay that loss given what else was going on that day it became a bet the company proposition as you have acknowledged the president was calling it an act of war that doesn't n d inquiry because if you have to look at the language of the policy we tried to call our foreign reinsurers that day in london and on the continent to find out what their attitude was with respect to applying the act of war treaty exclusion because if we paid it and then they did not honor the reinsurance we'd be bare on that risk we couldn't get return calls we decided within thirty six hours as mr brill has given us credit for doing that we would not apply the act of war exclusion and that we would honor each and every claim that was submitted to us the rest of the industry followed suit and has paid someplace between thirty five and forty five billion dollars worth of losses sorting the terrorist objective of undermining the economic stability of the western world thank you mr david you'd have to wonder using that indian probert of the elephants tangling in the grass being trampled if that in fact were taking place in a board room in let's say a tax haven so more else in a world where the not same commitment would've been honored mr shaw your testimony cites the brattle group study which was funded by foreign reinsurers is that true i believe so so they funded it i'd seen the first page and assess commission for that's all i know about the proper report and who that study says that cost will run of the additional eleven to thirteen billion dollars per year of h r three four two four is an active yes but i'm a bit confused by this is the bill only collect less than two billion per year in lost tax revenue from foreign reinsurers what accounts for the additional nine to eleven billion dollars a year that consumers will be charged mr i'm going to be honest i relied on the report and i'm not an economist i'm just looking at the data particularly the costs to the floor and insurance consumers that's primarily what i'm hearing up so you relied on a report that was paid for by the industry  let me let me try to explore this a little bit a little bit more mr berkley i understand that seventeen of your twenty two subsidiaries including the one based in bermuda have ceded more than fifty percent of their premiums to other w r berkley carriers in the reason what i'm at why i'm asking this is please indulge me as a u s company subject to u s taxes on all of your worldwide income i assume that you have rioter reasons non tax reasons for spreading the risk can you explain a little bit about the kinds of reasons that you and your company buy so much reinsurance well the reality is i'm fortunately for the purpose of this discussion what we would call a pooling is is called reinsurance and that is because of how the united states operates and the kinds of businesses we write we have companies licensed in individual states are structures such that we do business at different price points so we do business in lots of different corporate enterprises and then we have capital pools in several entities we have five capital pools seven capital pools were all the risks come back to all of which are in the united states so there's no tax benefits to us in doing that it's merely an issue of licensing and price points that this is not the same reasons that foreign companies so sure help me out if i am if i and the c e o of x y z property and casualty company headquartered internationally in europe and i have tens of thousands of people in the united states wouldn't there be some other incentives other than just tax purposes for doing what you do the answer is they still need to have licensed carriers to do what i do so that would not take the business outside the united states it's the step of removing it from the united states which creates the tax advantage and they i could do that in a way of using a particular type of reinsurance that wouldn't create any of the issues we're talking about so i they the kinds of reinsurance and i do within my group they have to do within the mass the company's anyway for licensing purposes i can't reinsurer for  company its business in ohio into bermuda because that wouldn't be admitted reinsurance it has to all stay domestic most of you know high is obviously a very competitive property and casualty stay we have pres all sorts of companies i haven't asked my insurance commissioner what her thoughts on this are but something mr shaw said with respect to the insurance commissioners of the gulf states being concerned or opposed to this legislation and you to comment on that as to why that would be if this is a i love and that it was added that and then mr berkley with your permission congressman has something to add be glad to have him do it it's important to understand that the insurance industry in the united states is a highly regulated one with respect to the largest consumer impact kind of insurance auto and homeowners state regulators will not simply allow us to pass along in increased rates whatever increased reinsurance charges may result from the increased taxation that they would face by closing this loophole if there is no simple pass along it would have to go through a state regulator and i can tell you from twenty years of experience it is very difficult to well get state regulators to allow you to pass it along second there are alternatives in the capital markets now to reinsurance if we're we are a large buyer at job of third party reinsurance let me be candid if they try to raise their rates simply because they're having to pay the same taxes that we pay we'll go elsewhere to buy that risk spreading we'll go to the capital markets and buy capital bonds and buy less foreign generated reinsurance we will not tolerate pressure on us to increase rates thirdly in the commercial marketplace and markets are highly competitive it's economics one hundred one congressman the capacity and supply exceeds the demand there is no ability to simply pass along increased costs to the insurance buyer like every other business a foreign company want to find out ways to bring its cost into line with what it has to charge that's what we do day in and day out all we're asking for is the same basis for cost with respect to taxes that others have i'm finally on your point with respect to affiliated reinsurance we have no interest in preventing the legitimate use of affiliated reinsurance by foreign owned insurance companies we use it in the us as mr berkeley has said they have to use it outside the only difference is when we use affiliated reinsurance we still pay taxes on it when they use it and they don't pay taxes on it louisiana mississippi and alabama first of all at least in my most recent discussion with commissioner from louisiana his view was changed after we has question and he was not in fact so enthusiastic about this although he did express the view that as far as he was concerned no tax was the right answer green with one of your colleagues here so he was favor of any tax but he understood that the problem was real and he was not at all when i spoke to the commissioner from mississippi he had presented with facts that mixed up fairly reinsurance so he had seen all the facts he was given a summary that was not full and complete and he had reconsidered his point of  view the case of alabama we didn't have a conclusive discussion but again he had seen all of those questions and that that discussion has taken place with commissioners in a number of other states and  commissioners such as delaware where quite a favor of this legislation so we just didn't think the battle for taxes was with insurance commissioners we thought it was here so serving on his board of trustees and guiding it through some very difficult times into his extraordinary success both academically and athletically i would point out that that may have taken thirty seconds but it was a well law would have this incredible impact do you believe that to be so him and why are the conclusions by mr shaw so almost polar opposite in terms of what they believe to be the cost to consumers well i think for first of all when when the facts are opposed to you try something else so first i  would be here suggesting that you would cut taxes by two billion dollars because then if the logic follows we could save consumers fifteen billion dollars or maybe cut taxes by five billion dollars and we could same consumers fifty billion dollars it's just if it fails any test of logic that a billion seven hundred million dollars of additional tax will somehow generate this enormous twelve billion dollars of costs just just nonsense sector secondly unfortunately this the insurance industry the property as a business is a cyclical business it doesn't change pricing based on costs it's a competitive marketplace based on market share capital and so forth as i said costs have been going up medical costs the largest one for the past several years and prices have been going down so the whole idea that this is going to somehow or another drive up costs when we're in the midst of the most competitive insurance marketplace we've seen in ten years is just an imaginary thing it's it's like the economists who want to borrow money from the bank and presented this financial statement five hundred thousand dollar dog got a statement and when the banker asked him how does even know that it is dog is worth five hundred thousand dollars and he told him well he traded his jew two hundred fifty thousand dollars with another economist so it must be worth five hundred thousand dollars that's how condiments come up with values it's a great theory just isn't proven by the fact it's a shot would you care to respond thank you i would actually i've only seen the data that supports what i've said i haven't seen data on the other side if i hadn't seen the chair referred to something i'd love to see it  but if you know economists always persuade i would have seen data on the other side to said the impact would be nil i haven't seen that i also kind of heard that you know we're making much ado about nothing this is an issue at least in florida that i've never seen unanimous support for this is consumer advocates this is insurance trade groups this is state legislators this is cabinet officials of both parties this is almost unanimous support opposition sorry to h r this proposal here and and logic in the argument of domestic american firms having to pay greater taxes and being disadvantaged it all as a consumer argument that is you know that's a tax decision that i know this this committee needs to make and that's in your hands i'm i'm here really because the data shows me that if this proposal were successful that the insurance consumers in the state of florida be adversely affected in terms of how much more they pay that's really what i'm here to discuss in the tax policy some data that mr dale has indicated came from the people position i have no reason something here that really is a disconnect and so mr show i'd like you to just help me the the data that we have and that is available to you is that this would have a cost a tax consequence of less than eighteen billion dollars over ten years you are quoting the study whether it's by the industry or not it's talking about having a consequence in terms of premium increases about six times the amount of the tax adjustment one hundred ten to one hundred thirty billion dollars over the next ten years now we've had testimony which i sincerely believe that this commercial market is a highly competitive one that does this give you pause at all that there will be one hundred ten to one hundred thirty billion dollar consequence for less than eighteen billion dollars of tax change the the commercial market and property market at least in the state of florida is not competitive and i can say that personal experience now and then can i just on this point do the few companies that take advantage of this do they this tax provision do they charge lower rates i do not know that and i beg your pardon i don't know i do not know that answer do you think they do should they should they charge lower rates because they play less in taxes  that is not that's that's not a company decision i'm not here as i said well you're saying that's that costs will go up if they pay more taxes so do they charge last because they pay less in taxes it only goes one way the report states the increased price consumers how the companies on both sides what decisions they make based on tax policy that's something for them to determine well but you're the you're the insurance advocate you're the expert here from florida i'm a consumer app yes now and i want to know if they currently if you have the commercial insurance companies that are foreign that take advantage of this tax loophole if they charge less i don't know that i can you find that out  competitive commercial marketplace in florida i'm surprised to hear the consumer advocate suggest otherwise it's a highly regulated homeowners rate state in florida you could not pass along the cost and just just for the record on two other items we were one of the companies that did pay twenty five million dollars for that horizon rig law and we do right one hundred nine million dollars of business in florida we don't write homeowners business in florida because of all the political turmoil in the homeowners please mr chairman thank you i would respectfully request from mr shaw representing florida to just say should be simple to find out if the people who are playing by different rules pass that benefit on in some sort of lower premiums because if not then i think the argument out a hypothetical and it was brought up in the previous with the previous witness let's assume for the sake of argument that as the leader in terms of the leadership of your given an alternative of lowering your overall tax rate as a worldwide american company or this bill what would you choose was in the answer that is easy i think the corporate tax rate the united states puts all of industry here at a competitive disadvantage and i'd rather solve the whole problem however the political difficulties that confront me and trying to do that don't mitigate the urgent need to rectify this unique unfair and i understand i'm i'm i'm but i'm asking you to prioritize and you were very clear so all of these hearings lately they all come within this context and the context that you three haven't been involved in this past drama we all have and it's an ironic context to find you he frankly and here's the irony this administration has been vocal advocates on a different piece of legislation international tax deferral rules that would change over those companies last time but they've been i d d as a pay for future for future revenue adventures shall we say and it's just a terrible idea now the irony is that they invite and they say look here's these worldwide american companies that are being disadvantaged by tax treatment and we want to we want to make this change so that we can help these worldwide american companies and i think the part that is a little tough to take not from you but it's frankly from the administration is look if you really wanted to help worldwide american companies you would take degnan choice behind door number one and that is lower the rate overall but that's not really the discussion with this majority and this administration i was recently at a breakfast in new york sitting around with  a lot of incredibly smart legal minds talking about tax codes and so forth and one of them raised raised their hand and said you know congressman the way the majority is talking about dealing with carried interest is going to have an adverse impact on the real estate market and i said do you really think that this administration is sitting around saying how do we come up with the most competitive tax code to make worldwide american companies the best in the world i said they're not this is a massive revenue grab revenues revenues revenues is what is driving this administration and so i think look there is there are subtleties to this argument you three have laid out and i'm sure that reasonable people can come up with the good remedy right i mean it is something that can be negotiated be very thoughtful but be careful of the dance partner that you're choosing to dance with because this is a federal government that once you start into this dance this is when when  done dancing with this administration they're going to keep you out on the dance floor when the lights are on and the music's done and say oh no no we're dancin all night long and that is i think the sort of the insidiousness of this proposal so i just i appreciate your candor on saying look when it when it really comes down to it it is tax rates that are going to help us and i'm not asking you to waive off you've been a good advocate for this position and i'm not trying to box you in or manipulate you into saying oh you're not really for that you're for it i get it but i appreciate the forthrightness with which you've approached this to say when it when it really comes down to it and now i'm  now i'm interpreting and i'm arguing from what you've said what this congress and this administration should be doing in terms of real priorities is trying to lower tax rates so we're not the highest in the world and ultimately create environment where where we're creating the most competitive advantages for worldwide american companies and i just have a couple of minutes left mr berkley are you trying to get my attention i think that no one wants who pay something approaching zero taxes in many cases lots of them and as long use we want to have a government and we want to have things we're not going to get there so the fact is the worst this does is make foreign companies write direct business here pay the same rate is we it's a win for everyone if we pass this legislation and then we lower tax rates that's great but this is about non u s companies who do direct business here and i think that it's it's needed because we're that i carried the party position to the president on the issue of the for all raise the issue with him separated avoidance from the federal and the outcome was i'd like to think that in that moment he came to a different perspective but the same time this is not i think to be construed as simply a revenue grab when you consider that the money for the war in iraq was borrowed and what we are for or against it's immaterial the bill is come due that's the real question and and i think that rather than describe this is a revenue grab there are many legitimate interests including our veterans hospitals for thirty one thousand who've been wounded and we're going to need for the next five decades minimum and i think a host of these considerations are out there so this is not simply a revenue grab and i thought mr berkeley did a good job of describing the fact that we need to address this issue and perhaps in tandem with the issue you raised about the corporate tax rate with that let me recognize the gentleman from kentucky mister thank you mr chairman i'd also like to add in relation to my friend from illinois comments that we are currently running at the lowest tax rate as a percentage of g d p in this country in sixty years last time it was this low was nine hundred fifty and we as part of the recovery act passed the largest tax cut in terms of the number of people affected ninety five percent of the american people in the history of the country but in relation to the issue at hand it seems to me the three points we should be concerned about one is the effect on consumers mr shaw has expressed his opinion about it's his  concern about the residents of florida and i would just ask him assuming that mr degnan and mr berkley's assessment is correct and there would be no increase in premiums do you have any other reason for opposing the legislation that we're considering here today my opposition is simply because i've seen numbers that show that floridians would pay over two hundred sixty million more in homeowners and two hundred sixty million more commercial if it was proven to me that there was no there'd be no detrimental impact t consumers i'd be fine great ok thank you for that so there are two other points that were raised in testimony that i think are worthy of consideration and raised in questioning one is the impact on on american jobs we have a twenty year experienced roughly with the present situation and my question to mr degnan and mr berkley is is there any reason to expect that by adopting  the legislation that we are considering here today that there would be a loss of american jobs for first i should say that in the past three years we've started twenty one new operating companies and added a thousand new employees in the united states so we were growing we're cardless of the economy and we probably would grow more if the tax legislation were passed but i think that the the change in jobs in the short run would be modest and it would be slightly positive but not consequential in the long run it would be overwhelming because like the reinsurance business which is migrated out of this country which used to be thousands of jobs in lower manhattan and in hartford that that business has basically left the country so over the long run if we don't solve this problem the industry will berkley oh the long term impact of not closing this loophole will be as some people smarter than i who observe the industry and have less of a company bias have has observed the arguments will become compelling that the offshore tax advantage drive vocational decisions and eventually they will overcome the negative reasons of not relocating we've seen it happen in the reinsurance industry at berkeley and berkshire hathaway the last two american reinsurers of any significant size and it's beginning to happen in the primary markets as well where one hundred twenty seven year old company started in san francisco migrated to new york we don't want to leave the united states we have no intention of doing it now but the pressures will grow greater and i'm leaving here because how could i leave  what america has done for me i'm certainly appreciate that and respected and share your sentiment final point that we should be concerned it seems to me and this came up and i forget which of your testimonies in your written testimony was the impact on capital availability in the  united states particularly with reference to the purchase of municipal bonds and therefore the financing of very important projects infrastructure and otherwise throughout the country i think it's important just to mention you've testified to that effect that the impact of not adopting this right this new these new rules would be in fact to reduce the amount of capital it's available for all these municipal and state projects throughout the country is that correct exactly congressman we are in an as is mr berkley's company a very large buyer and so is the domestic property casualty has been estimated twelve percent of all the tax bonds in the united states are owned by u s property casualty companies we buy them because we have taxable income in the united states we manage our investments so we can pay our claims and we never fail to do that foreign companies don't buy them because they don't pay us taxes they would presumably become buyers of them if they paid the same from the neighboring district in louisville kentucky and with regard to the comments on the lowest tax revenue you know one might infer in the media that we were talking about tax rates but i think comparing us to one hundred fifty the reality is that we're at an incredibly low rate of revenue because depressed economy and fear in the job creating sectors of the huge economic impact of the health care legislation passed the potential cap and trade legislation which would hamstring american manufacturing and energy and you know wider variety of  hearing i'm hearing the benefits to your companies fair enough and i couldn't agree more with the gentleman from illinois and what he said very broad basis how however i go one step deeper with this let's remove your companies from this aside and look at those who need reinsurance to remain competitive where it is a cost priority and in fact in commodity businesses had a huge impact on their ability to turn a profit particularly seasonally and like to turn back to mr shah we have a lot of farmers in kentucky in various forms of not only domestic but global agriculture competition florida is one of the market baskets for the united states  and the commissioner florida's agriculture department and consumer service on a letter to chairman baucus and to ranking member grassley over in the senate finance committee expressing their concerns about possible effects of the legislation on crop insurance in florida and i know you're not an expert on ag issues and i can put you on the spot with that given that you are representing florida from a consumer advocacy would you like to make some potential comments about the potential facts on our farmers in florida maybe elsewhere and also frankly the impact on consumers of these products well i think it all comes back to the cat danger where the hurricane to more damage to crops or earthquakes or anything anything that these insurance companies have to get reinsurance for in florida the marketplace is so sensitive to the price and availability of reinsurance it is just it's such a unique market it is hugely sensitive i sent n s part of my official duties i sit in on the right hearing process so when companies come before the insurance department and request rate increases or decreases mainly increases a lot of it is really because of reinsurance fluctuations and that is just how the market isn't and really you know we've heard a lot about other policy issues and another affiliate insurance transactions issues but you know the data that i've seen shows that this is a price increase for those policyholders this is a congressman i believe from the bottom said it was forty four million and the bottom well it's a lot more in that the state of florida because of our cap exposure it's a lot more than that when you're talking about louisiana you're talking about are on the gulf coast i think that's the answer while those insurance commissioners are in lock step in opposition to that house because of that cat exposure and the fact that reinsurance is such a backbone to the market in those states in florida that any fluctuation in that is going to upset the market would question and i follow up on that in your opinion would it be better to handle an issue like this is part of a comprehensive tax package and the reason i'm asking this is there are so many threads particular dealing in international taxation issues international finance would you rather see that in a more global context rather than a narrow piece of legislation i would you know i'm just going to venture into this i'd like to see it more narrowly addressed i think when you when you address things in a global manner you don't get things the attention maybe they deserve and at least this is getting attention and it's getting you know focus from this committee and that i do appreciate i'd like to see it more s government property sure it's ultimately the risk is the federal government there intermediary participation through underwriters and then it goes through insurers which are forty lou about forty point one percent of those underwriters are foreign owned yes they would be adversely impacted impacted because they get subsidies from the government but this would not impact the ultimate cost of risk nor would catastrophe business because the ultimate risk their crop insurance or in the united states is the federal so you're saying that there would be no impact on consumers whatsoever for food products and things like i said for crop insurance i didn't say for food products or any i got secondly i said i would say that for the reinsurance costs will not be impacted it's a very competitive market reinsurance prices have gone down this is not going to change the cost of reinsurance this is in the insurance marketplace is four hundred fifty five hundred billion dollar marketplace so we're talking about a cost of less than two billion dollars if you would even say that cost was what drove prices which it isn't because competition drives prices it would be insignificant and in fact as unfortunately we've seen prices going down costs don't drive prices that is just the full aisha's reasoning of a group of who sit and tell us how everything is going to happen it's just not true and many many of the economists that we could probably find some common ground on there is would be nice if they had worked in the private sector before pontificat yield back to the chairman thank you thank you mr davis and let me recognize the gentleman from florida mr meek thank you mr chairman in glad we are having this hearing i think it will be educational for all of us not only on the committee but those that are involved in this issue first of all i guess everyone speaks of florida may actually have a home in florida and a part of the citizens property insurance not the fact that i want to be used only thing that's there for us we have many been hit hard i can tell you that i do have great concern with this piece of legislation only myself but i think in a bipartisan way democrats and republicans are against it it would be hard for me to believe that a member of the florida delegation or north carolina south carolina or louisiana delegation would even say that i'm ready set go to vote on this piece of legislation senator bill nelson who is and who is a former insurance commissioner i'm pretty sure all of you on the witness panel are familiar with his involvement in insurance and reinsurance and the the situation it floridians are under right now of insurance companies leaving the state of florida and we're having to as the mr shaw has mentioned having to really  operate under a microscope and trying to make sure insurance is affordable and can cover issues that may come about in florida this bill would bring about a great deal of  difficulty as it relates to the cost of insurance i think that when we look at the millions of dollars that have been projected if the ratings are going to have to pay that's what brought about this bipartisan spirit and i must say it is considered a purple state politically but when it comes down to this we're solid i think it's important also to know that when we look at this issue and mr shaw i want you to go a little further because i've been watched your opening statements and i've had my staff here and i've read the opening statements of the two witnesses but i think it's important for you to even go further it is not just a florida issue i want to make sure that folks understand that florida is just not by itself states that have been hit by hurricane states that are dealing with the sinkhole scituate in states that have individuals who have their insurance card on their dining room table because they had to use it that often are going to be affected by the passage of this legislation and i will tell you speaking to some of my friends in the senate some of my friends here in the house this would be something that they would actually start to grab a arms and when i'm saying arms i'm talking about political arms and making sure that this legislation does not move forward because of the the effect that it will have not only on for radians but also folks in the gulf coast it is already putting up with more than they can bear right now as homeowners as property as businesses i do see some merit in it as it relates to competition and i think  that that merit would be good on on a sunny day but this is not a sunny day for the gulf coast states stephanie not a sunny day for the state of florida when it comes down to this reassurance issue and is much as i respect the proponents of this bill and that are good friends of mine i look forward to working with them but i want to make sure in this hearing that we have an on the record of what will be the immediate effect on states like mine that are already on its knees if this legislation was passed michel can you talk a little further about the fact that citizens property insurance which is pretty much a state ran insurance package that we do have and what effect that this bill will have as it relates to floridians i think it's important that we understand and i don't want you to speak for any other state because you're not the person from that state i must say that  it exactly what i wanted to say let me talk about i said i might have misconstrued or someone has committed might have misconstrued what i said the property insurance homeowners market in florida is not competitive i don't know if i said the commercial market was not competitive to ash and i would have missed by and said that i'm talking about homeowners property insurance and exhibit a of that is that the largest property insurance in the state of property insurance companies state of florida citizens that's the state run insurance company that has over a million policies now that is the bigger that company gets the worse it is for the citizens of the state of florida because that's not private capital that's taxpayer assessment that's taxpayer capital we have the florida hurricane catastrophe fund that is a mechanism whereby we try to entice and make sure that companies can get cheaper insurance that is taxpayer based and their ability to go out and get bonds in the private sector also determines how much money they have but all these are state run mechanisms if you affect the level of alle ability of reinsurance or even the price of reinsurance companies are going to shrink what they want to do in florida because they can't afford to be their companies such as you know all staged a farm who are already shrinking their presence in florida we have a whole bunch of what we call florida domestics in the state of florida who are really smaller companies that do business in florida they can't afford reinsurance and someone in miami dade can't get reinsurance because no one will guess where they have to go citizens property insurance company that puts florida on the hook for even more if that company ever has to pay out so florida even under the current system that we have now is a fragile market and if we do anything to mess with the availability reinsurance price of reinsurance farm is the largest they wrote eight hundred eighty eight million dollars business last year and citizens wrote seven hundred eighty seven or ninety million but that that aside the problems in florida's homeowners market are real severe everything congressman said absolutely true but this bill will not impact those issues those issues are need to be addressed but this has nothing to do with it and when we want to impact whatsoever mr chairman like as i said earlier i'm glad we had this hearing because it's educational for us all those of us who live within the area codes in zip codes of florida understand that this issue of insurance anything that will send it to a higher cost suffer radians and even when you look at reassurance and looking at how many u s companies take advantage of reinsurance to be able to even write the policies in florida you ask the average school ready and more and more floridians are becoming a member of the citizens pool and other states like it florida has been leading the charge mr chairman as you know you've been working with downs on this issue of a catastrophic insurance fund to take some of the weight also florida right now i guess after this hearing as we share the testimony and also learn more from other experts and staff we will figure out the true effects but i  do want to thank you sir for having this hearing i want to call so thank our witnesses for coming forward and i look board my staff and other members of congress reviewing the testimony today for its accuracy thank you thank you mr make we can we know why you are a good candidate i can tell you that the city paper put it bermuda on the potomac he claims to have the support of the florida and mississippi insurance commissioners for his proposal and while i understand you are not the tax collector for florida may not be sensitive to those concerns would you agree that there has to be some sense here of a race to the bottom of these issues i'm not familiar with that proposal i'd i'd like to look at it are you asking a global question or you're asking for that specific  if we continue on this path of companies moving offshore for the purpose of avoiding american taxes is it not fair to raise the question down the road of how do you pay for those men and women in iraq and afghanistan how do you pay for social security and medicare and some of the obligations that we have if it only becomes tax avoidance sophisticated tax avoidance as opposed to the obligations that we have that we're going to continue down this path and if you want to give me a philosophical answer that's fine because i'm going to move to the other two panelists will be closest here i know there are a lot of there are a lot of competing ideas here a lot of implications that you will have to think about that quite frankly i don't and you're correct in that and i'm here for that narrow issue of the insurance consumers but there are other considerations that you have to think about and i understand that i'm just here to talk about the narrow focus on consumers but i do know that you have competing interests that i necessarily don't have to thank you mr seabury was right thank you all would like to have less taxes we don't want to have no taxes it would be wonderful but it doesn't work with societal obligation we don't want to solve the florida windstorm problem which is a severe problem and is a fundamental issue with the nature of florida's coastal exposures but none of those issues have to do with this issue this year she has to do with the unfair tax advantage that foreign based companies have where they can really insure their affiliates and maximize their ability to pay the least possible taxes that's what this is about it's not about minimizing risk because they can minimize risk within the structure of this bill it's about one thing and they've spent a lot of time and a lot of money because they have billions of dollars a year at state and trying to confuse the issue these are simple it's unfair and it never was intended by congress that foreign owned insurers be able to set up domestic affiliates and reinsurer that business overseas and avoid paying taxes and thus have a competitive advantage to domestic companies it's already effectively remove the reinsurance business from this country it's starting to move other parts of the business if we don't act we will find ourselves without a domestic insurance industry thank you mr degnan last word thank you mr chairman i would like to address just a couple of  issues on florida because i think congress and the grazed an important issue and mr sze made a point of talking about how small in florida mr berkley's company was in the homeowners market chubb wrote almost six hundred million dollars with a premium in the state of florida in two thousand and nine it is about our fourth or fifth this largest premium generating state i sat on the j u a for seven years and that's senator nelson's request it was the predecessor to citizens union i know a lot about the florida market and we care a lot about it as a as a company where one of the few companies in fact that hasn't set up a florida pub so we can walk away from our losses when the big one hits which it will in florida will honor every claim of every insured that we have we have in florida so we care deeply about it first of all congressman your two y concerns are absolutely appropriate but the foreign reinsurers are so vigorously oppose this bill right an infinitesimally small part of the direct commercial or homeowners market in the state of florida secondly we have an examination by respected group of accountants of the comments that suggest there was absolutely no impact on homeowners insurance rates or reinsurance capacity in the state of florida from this bill in part because it attacks only affiliated reinsurance among group of companies within their group not true third party reinsurance which is what is provided to back up catastrophe losses in the state of new jersey so while we totally agree with their concerns and in fact share them and empathize with them we don't believe that this bill will adversely impact florida and finally a seventeen billion dollars tax subsidy for foreign insurers is a heck of an inefficient way to help out homeowners and commercial insurers in the state of florida  sure where building this for the record mr chairman i i'm glad that all witnesses agree that laura has not only a unique situation but a situation it other gulf states  have or will be approaching as it relates to events i do know that a number of the companies that are reinsurers are our concern or taking reassurance from  from offshore companies i think it's important that you understand and understand the merits in the argument and the basis of the bill understand what i'm saying at this particular time due to the fact that we're dealing with a very fragile situation and the bad economy is this to write time to move forward with this legislation i am not by any means don't think that i am an expert on this don't think i do know is that i'm a part of the florida insurance  now i also do know that senator bill nelson who i really look to as it relates to making sure what's good and what's right for consumers he wakes up in the morning figuring out how he can kill this bill ok so i'm just want to let you know that this is a serious issue with members of the florida delegation which i am all for american apple pie and i'm all for it believe me you had me at hello on that but i think it's important we look at this insurance issue and we hear language like oh minuscule anything difference in cost that minuscule piece can be two hundred sixty million dollars or above and we have to share in floridians that they will not have to take on an additional cost of things that they can't even afford now so mr chairman again the accuracy of the testimony need to be from mr shaw from the other two witnesses or for any of us here will come out as staff starts to look at this issue and we get more information you know agree with a lot of arguments that i just you know as a representative of florida and even those who are not you know running feel the same way that i do about this issue and with me being one of two members of florida on this committee and i think only the only member on this subcommittee that's from florida you know i would have to raise these issues and i hope that they can be resolved and mr chairman again sir thank you for the latitude and thank you for bringing this before the committee so that we can have an open airing on this issue thank you to all the waitresses and let me thank the gentleman for his thoughtful consideration i want to thank the panelists today for their testimony on this important subject you may receive some written follow up questions f members and i hope you will respond properly so that we may include those responses in the record there being no further comments in the hearing is a