A proposal to end a reinsurance tax benefit used by US insurers with foreign affiliates is being opposed by European insurers.

The plan – in President Barack Obama’s budget for next year – would close a loophole that costs the Treasury billions of dollars each year and gives foreign-based groups an advantage over local competitors, according to the US Coalition for a Domestic Insurance Industry.

Insurers with foreign parents currently escape US tax on much of their domestic underwriting and investment income by reinsuring with foreign affiliates in low-tax jurisdictions, the coalition of 13 American groups says.

But Insurance Europe, a Brussels-based group representing 34 industry bodies, claims the budget proposal would limit capacity to the US market and have a negative effect on consumers.

The group and 27 other associations, consumer groups and companies have written to the US Congress opposing the plan.

“It would lead to reduced capacity and higher premiums in the US insurance market, especially for natural catastrophe cover,’’ Insurance Europe said.

The opponents’ claims are unfounded, according to US coalition member and WR Berkley Chairman and CEO Bill Berkley.

“At a time of burgeoning deficits and possible tax increases on US workers and businesses, it’s unfathomable that we would continue this unintended loophole allowing foreign-based insurers to avoid US tax on their US-based business,” he said.

The changes would not affect third-party reinsurance that adds overall capacity to the market by shifting risk to unrelated parties, the coalition says.

The Obama government has tried unsuccessfully to remove the tax benefit in previous budget proposals. A resolution may still be years away, according to a report by AM Best.