Bermuda reinsurers have a powerful backer in their battle against proposed US tax changes that could be harmful to the Island's biggest industry — the European Union.

The EU has fired off letters to several US trade and finance officials, including Treasury Secretary Timothy Geithner, to slam "protectionist" measures outlined in US President Barack Obama's budget proposals regarding affiliated reinsurance.

Angelos Pangratis, acting head of the EU delegation to the US, told Mr. Geithner in his letter that the European Commission believed the tax proposals were at odds with a level-playing field for domestic and foreign insurers and reinsurers in the US.

"This penal tax regime would only apply to foreign-owned insurers; thus it would not result in protecting the US tax base but in creating a disadvantageous tax environment for foreign insurance providers," Mr Pangratis wrote.

"This could result in higher premiums for US policyholders or even the withdrawal of non-US operators from the US reinsurance business, leading to job losses for many US citizens employed by those companies."

Similar letters were sent to Ron Kirk, the US trade representative, and Peter Orszag, Office of the Management and Budget director.

The EU is home to several of the world's biggest reinsurers, including Munich Re, Hannover Re and the Lloyd's of London market. The proposals would impact them, just as it would some Bermuda-based insurance groups with US subsidiaries.

President Obama's proposal would disallow US tax deductions on reinsurance bought from affiliate companies based outside the US. If it became law, it would hit the bottom line of several Bermuda-based insurance groups with US subsidiaries.

It resembles the bill put forward by Democratic Congressman Richard Neal, who said he wanted to end "the use of excessive affiliate reinsurance by foreign insurance groups to strip their US income into tax havens, avoid tax, and gain a competitive advantage over American companies".

The protestations of the powerful trading bloc lend considerable weight to the argument put forward by the Coalition for Competitive Insurance Rates (CCIR), of which the Association of Bermuda Insurers and Reinsurers (ABIR) is a member. ABIR president Bradley Kading voiced support for the EU's views yesterday.

"The EU letter acknowledges significant insurance availability and affordability problems for US consumers if the discriminatory reinsurance tax is enacted," Mr. Kading said.

"That's what RIMS (Risk and Insurers Managers Society) and the Florida Consumer Action Network have argued for several years. The tax is punitive and unfair."

The US relies heavily on reinsurance from overseas, particularly from Bermuda. ABIR estimates that around 40 percent of the property casualty reinsurance for the US comes from Bermuda. Florida gets 90 percent of its reinsurance from overseas, according to the CEA, the European industry trade body.

ABIR has cited an economic study by the Brattle Group, which showed that enactment of the Neal bill would likely cost US consumers $between 10 billion and $12 billion in higher insurance premiums. And property owners in some areas of high hurricane risk might struggle to find coverage at all.

In his letter, Mr. Pangratis wrote that the current proposal would clearly include reinsurance contracts with companies in Europe, where the average tax burden was 25 percent.

He said this would lead to higher costs for European insurers, who play a significant role in US insurance markets, and could lead to higher insurance premiums for US consumers, the withdrawal of foreign companies and job losses.

"We have doubts whether the primary aim of this provision is tax evasion," he wrote. "Instead, the main aim of the proposal appears to protect the US insurance and reinsurance industry through a discriminatory treatment of foreign insurers and reinsurers." Mr Pangratis added that this would contravene the G20 commitment to fight protectionism and specific US commitments in the General Agreement on Trade in Services that insurers and reinsurers of any other World Trade Organisation member must be treated no less favourably than US suppliers.

"This is a strong message coming directly from the European Union, and should serve as fair notice that the international community strongly objects to this anti-competitive proposal," said Nancy McLernon, president and CEO of the Organisation for International Investment, a business association representing the US subsidiaries of companies headquartered abroad.

"There's no doubt this proposal is discriminatory in nature and violates fundamental concepts of tax equity and our US treaty obligations. At a time of such global financial turmoil, the US should be encouraging, not discouraging foreign direct investment in the US insurance markets."