Last week we told you about the $24.6 billion potential sales loss for the insurance industry if the US tax code is reformed to include a border-adjustment tax (BAT). Now it has been estimated as to just how much it would affect property-casualty (P&C) insurance premiums in California.
A study by R Street Institute said BAT – also known as destination-based cash flow tax – applied to the import of reinsurance will lead to an increase of $1.91 billion in the cost of P&C insurance premiums over the next 10 years.
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“While the precise contours of congressional tax-reform efforts are yet to be determined, proposals such as a BAT or a partial BAT, a reciprocal tax, territorial tax, a discriminatory tax on insurance affiliates, or a minimum tax all would affect insurers’ ability to use reinsurance to spread risk globally, and hence disproportionately harm consumers in states like California and their ability to secure insurance coverage for their homes, cars, and businesses,” wrote study authors Lars Powell, Ian Adams, and R.J. Lehmann.
According to the study, California residents are overexposed and underinsured with regard to earthquake risk – and the California Earthquake Authority has been trying to boost the take-up rate of earthquake insurance. R Street said the ability to keep doing so would be hampered seriously should the cost of reinsurance be driven up.
The authors stressed that insurance companies don’t just import reinsurance but export risk as well. “Denying insurers the ability to engage in responsible risk transfer would mean concentrating those risks here on our shores,” they said.
R Street Institute estimates there would be a $59 billion rise in the lifetime costs of typical life insurance and annuity policies if BAT pushes through.
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