Plans to end a reinsurance tax loophole used by foreign-controlled insurers operating in the US are “short-sighted”, an industry group has claimed.

Legislation has been introduced to Congress that would stop foreign-owned groups cutting their US tax bills by entering into reinsurance transactions with affiliates in lower-tax jurisdictions.

Such a law would shrink the US reinsurance market by 20% and force consumers to pay up to $12 billion more a year for insurance, according to the Risk and Insurance Management Society (RIMS), citing a 2009 study.

“This short-sighted legislation fails to realise that if organisations are forced to abandon their offshore counterparts, the financial burden of catastrophic risks would fall on the Government and policyholders – an alternative that could shatter this country’s economic vitality,” RIMS spokesman Carolyn Snow said.

However, the Washington-based Coalition for a Domestic Insurance Industry has urged Congress to pass the legislation, which it says would give the Treasury more than $US12 billion ($12.39 billion) over 10 years.

“Congress never intended to give a preference to foreign-controlled insurers over their domestic competitors,” WR Berkley Chairman and CEO and coalition member Bill Berkley said.

The legislation does not affect third-party reinsurance and it is “highly unlikely” foreign groups will stop serving the US if the tax benefit is removed, the coalition says.