Buried deep within President Barack Obama’s FY2014 budget released this week is a provision that calls for changing the tax treatment of reinsurance transactions here in Bermuda.The administration wants to “deny an insurance company a deduction for premiums and other amounts paid to affiliated foreign companies with respect to reinsurance of property and casualty risks to the extent that the foreign reinsurer (or its parent company) is not subject to US income tax with respect to the premiums received.”That’s according to the US Treasury Department’s newly-released “Treasury Greenbook”, which provides an explanation of the Obama Administration’s revenue proposals for Fiscal Year 2014.US insurance companies are generally allowed a deduction for premiums paid for reinsurance — that is, insurance for insurance companies — if the reinsurer is a non-US based affiliate. Reviving a proposal that’s been included in several of its previous budgets, the Administration’s plan calls for disallowing that deduction.The Treasury department document says the Administration calls for the change because reinsurance transactions with foreign affiliates, like those based in Bermuda “can result in substantial US tax advantages over similar transactions with entities that are subject to tax in the United States.”It adds that the excise tax on reinsurance policies issued by foreign reinsurers is “not always sufficient to offset this tax advantage.” The Administration argues that the tax advantages “create an inappropriate incentive for foreign-owned domestic insurance companies to reinsure US risks with foreign affiliates.”The President’s budget proposal closely resembles legislation first introduced in the House by Rep. Richard Neal (D-MA) in 2008 and again in 2009. It was then reintroduced in 2011 with the added sponsorship of Sen. Robert Menendez (D-NJ) in the Senate. But the long-stalled legislation has failed to garner enough support in either house of Congress to get it passed.Brad Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers (ABIR), which represents 22 of the world’s largest international re/insurers, has been lobbying on Capitol Hill against the Neal Bill for more than six years now. He says the budget proposal would take away reinsurers’ ability to diversify and spread risk.“Affiliate reinsurance is a fundamental component of insurance group operations,” Mr Kading said. “US and non-US insurers use affiliate reinsurance to spread risk and match capital with risk — this helps generate capacity to meet client needs. You can’t do business without it.”“People sometimes forget that all insurance and reinsurance transactions between US customers and Bermuda re/insurers are already taxed — and taxed on a gross receipts basis,” Mr Kading added. “You get taxed even on unprofitable transactions.”“The proposed tax is an add-on, punitive, protectionist tax,” he said.While proponents of the Obama Administration’s proposal say the policy would nix a long-standing and unfair advantage for foreign-owned insurers, R.J. Lehmann, a fellow with the R Street Institute, a non-profit policy research organisation, says the proposal would benefit only a small group of US insurance companies at the expense of American consumers.“Its costs far exceed the revenue it would generate and its ultimate effect would be to drive reinsurance capital — so sorely needed in catastrophe-prone states like Florida, Louisiana, Texas and California — out of the country.Congressman Neal estimated his bill would have raised about $11 billion of revenue over ten years. Treasury Department however, says the President’s proposal would bring in $6.2 billion over ten years — a drop in the bucket, opponents say, when compared to the US national debt, which currently stands at more than $16.7 trillion.Approximately two-thirds of all reinsurance coverage currently required to protect American homes and businesses is provided by non-US reinsurance companies. In Florida, less than ten percent of that reinsurance comes from US companies — with the rest coming from foreign affiliates — 62 percent of them right here in Bermuda.In an economic impact study of the Neal-Menendez bill, the Brattle Group, an economic consulting firm, found that the proposed tax would reduce the net supply of reinsurance in the US by 20 percent — which would raise rates.“State regulators recognise this essential need and consumer benefit of affiliate reinsurance, which is why regulators from Florida, Georgia, Louisiana, Mississippi, North Carolina and South Carolina have written letters to Congress opposing the tax,” Mr Kading said.The Coalition for Competitive Insurance Rates (CCIR), of which ABIR is a member, has objected to the proposal, calling it a “protectionist” move that will “drive up the cost of insurance” for American consumers. The CCIR says it is “a major threat to homeowners and small businesses in disaster-prone states”.“As lawmakers continue to fight for emergency aid to help rebuild following Hurricane Sandy, the President’s budget proposal appears to ignore the fact that insurance companies are expected to pay nearly 50 percent of the losses incurred from Hurricane Sandy,” the CCIR said in a statement.“As we reflect on the disastrous events of the past year, it is clear the US needs a robust insurance market that is open to as many competitors as possible,” said James Donelan, the Louisiana commissioner of insurance. “Hurricane Sandy and the 2012 drought underscore the important role that international reinsurers play in times of crisis.”Bill Newton, executive director of the Florida Consumer Action Network said targeting global insurance companies would be “disastrous” for his state and other areas vulnerable to natural catastrophes.“Instituting this tax would significantly reduce the supply of reinsurance in the US, decrease America’s ability to manage volatile, catastrophic insurance risk, and would further burden American homeowners, large and small businesses and public sector organisations during these challenging economic times,” Mr Newton said.The Brattle Group estimates that in Florida alone, the price of Commercial Multi-Peril Insurance would jump 12.6 percent for businesses and Florida families could see their Homeowners Multi-Peril Insurance go up by 4.2 percent.Carolyn Shaw, of the Risk and Insurance Management Society (RIMS) said with increasing potential losses due to extreme weather all across the US, the demand for global reinsurance is now greater than ever.“The ability to pool US hurricane and earthquake risks with the risks for typhoons in Japan or earthquakes in Latin America means US coverage costs less than it would without reinsurance, making it therefore essential for US consumers and businesses,” Ms Shaw said.“Throwing up a protectionist wall to block globally-provided reinsurance is a risk that US businesses cannot afford, and would invite trade retaliation against the US from its largest trading partners.President Obama’s nearly $3.8 trillion dollar budget blueprint for the 2014 fiscal year now goes to Congress, which hasn’t passes a budget in more than three years.