Taxing foreign reinsurers taking on risk from their US affiliates would reduce the supply of insurance, increase costs for clients and is particularly negative for the P&C market according to a report by economic consultancy, The Brattle Group.
A drop in reinsurance supply is estimated at 13% nationwide or an aggregate decrease of $18.3 billion. This would lead to costs going up for consumers, Brattle said, by $5 billion annually.
The tax being considered by Congress is meant as a punitive measure and
The Impact of Offshore Affiliate Reinsurance Tax Proposals on the US Insurance Market study found reinsurance structures are paramount in natural disaster coverage.
“Affiliate reinsurance is central for insurance groups because it addresses the problems of adverse selection and moral hazard, and also allows for efficient intragroup capital management,” the study said.
“The new anti-affiliate reinsurance tax proposal will adversely affect US homeowners and businesses, who will likely encounter reduced availability and higher prices for property and casualty insurance for infrequent but high-loss events.”
A border adjustment tax, part of House Republicans’ tax reform, would compound the issue, according to Brattle.
“Our analysis shows that the new proposals would lead to a degradation of the ability of firms to manage risk, both inside and outside the P&C industry,” Dr. Michael Cragg, principal and chairman of The Brattle Group said.
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“It would widen the protection gap between insured and uninsured losses, which would result in the excess risk falling on the government, particularly for natural catastrophes and other high-loss events.”
The findings were commended Tuesday by the Coalition for Competitive Insurance Rates which described the proposed tax as having “drastic impacts”.
Part of the issue with the tariff before Congress, the report argues, is the barrier it puts on spreading risk globally.
Florida, New York, Louisiana and Texas, all disaster prone states, are expected to be the biggest losers should the tax be implemented.
The Brattle Group thinks the Sunshine State is the worst affected in the event of the tax.
“It’s important for consumers to have solid research that accurately measures the impact of the Warner/Neal proposal so they can let their lawmakers know what a mistake proposals like these really are,” Bill Newton, executive director of the Florida Consumer Action Network (FCAN) said.
“As The Brattle Group study illustrates, decreasing the supply of insurance raises consumer premiums. Florida legislators from both parties recognize how sensitive the balance is between insurance premiums and economic growth. And when consumers are spending more on insurance, they are investing less in local businesses and communities. These are serious consequences – consumers deserve better.”
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