New Brattle Report Highlights the Dangers of Foreign Affiliate Reinsurance Tax on Consumer Access to Insurance and Reinsurance

Study’s data warns of correlation between reinsurance tax and consumer tax hike according to the Coalition for Competitive Insurance Rates

Washington, DC (January 23, 2017) — The Coalition for Competitive Insurance Rates (CCIR), the leading voice for continued and increased competition within the insurance industry, today commended a study examining the impact of legislation introduced in the 114^th Congress by Sen. Mark Warner (D-VA) and Rep. Richard E. Neal (D-MA) (S. 3424 and H.R. 6270) to levy a special punitive tax on foreign-based companies providing reinsurance to US affiliates. Released by the Brattle Group, a leading economic consultancy, the study found that among other drastic impacts, the proposal will reduce the supply of insurance and reinsurance, driving up the cost for consumers, homeowners, and businesses. The study, The Impact of Offshore Affiliate Reinsurance Tax Proposals on the U.S. Insurance Market, follows two earlier studies in 2009 and 2010 which examined the effects of earlier versions of the offshore affiliate reinsurance tax increase legislation.

“The numbers really do speak for themselves,” said Lars Powell, one of the study’s authors and director of the Alabama Center for Insurance Information and Research. “This study reaffirms prior Brattle studies on the issue: if the US subsidiaries of foreign-based reinsurers are subject to the tax outlined in Sen. Warner’s and Rep. Neal’s legislation, then there will be a marked decrease in the domestic supply of insurance. This will increase costs, and homeowners and businesses throughout the country, especially those in areas that are vulnerable to catastrophes, will end up paying the price.”

The Brattle Group’s study quantifies the harmful effects of denying a deduction for certain premiums – the crux of the Warner/Neal legislation — which aim to impose an unnecessary and costly tariff on the companies that help spread insurance risks globally. The Brattle Group found that this would decrease the supply of reinsurance by 13 percent nationwide, with an aggregate drop of $18.3 billion in supply. The result: a steep hike of $5 billion in higher annual costs for consumers. The study also found that the reduction of supply in reinsurance would increase prices significantly in certain natural and man-made disaster-prone states, including Florida, New York, Louisiana and Texas. These steep price increases are especially profound in Florida, where, when looking at just the homeowner and commercial multiple peril insurance lines, consumers and businesses would face both a $649 million reduction in the supply of insurance and an additional $350 million in annual costs.

“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,” said Bill Newton, executive director of the Florida Consumer Action Network (FCAN). “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.”

Overseas reinsurance companies are the largest providers of US property catastrophe reinsurance and also provide catastrophe-exposed insurance via US subsidiaries. Foreign insurers have provided substantial support following recent disasters: foreign reinsurers paid nearly 50 percent of the estimated $19 billion in losses incurred from Hurricane Sandy; an estimated 85 percent of privately insured crop losses resulting from the 2012 drought (approximately $1.2 billion) were paid by international reinsurers; and, in the aftermath of the 2001 terrorist attacks on New York, international insurance and reinsurance firms paid 64 percent of the estimated $27 billion in US payouts for the claims.

Recognizing the economic disadvantage that would result from this proposal and similar legislation, state and federal officials from across the political spectrum have spoken out against reinsurance tax proposals. Current and former state insurance commissioners representing Florida, Georgia, Louisiana, Mississippi, Nevada, North Carolina, Pennsylvania, South Carolina, and most recently, Utah Insurance Commissioner Todd Kiser, have publicly criticized the measures, as have agriculture commissioners from Florida, North Carolina and Tennessee. Florida Governor Rick Scott has also criticized the proposals. The new Brattle study showed that no state would remain unscathed by the potential impact: Wyoming would be least affected with an increase of $5.48 million across all lines of insurance, and California would be most affected with an increase of $480 million.

“This study comes at a critical time,” said Louisiana Insurance Commissioner James Donelon. “As lawmakers begin to consider reforming the tax code, they must be mindful of the sweeping effects that the proposed Neal-Warner legislation will have on homeowners, consumers and businesses if enacted. Louisiana alone will see insurance prices skyrocket more than $30 million, and I am sure that my fellow insurance commissioners throughout the country, many of whom also oppose this measure, would strongly agree that this will hit nearly all Americans in the pocketbook. That isn’t something to take lightly.”

The Brattle Group report also examined the effects of “border adjustment” on the insurance and reinsurance industry. A border adjustment tax, which is applied to goods and services consumed domestically, would have a similar effect to the Neal-Warner legislation’s proposal – it would deny US subsidiaries the ability to deduct premiums ceded to their international affiliates. According to The Brattle Group report, a border adjustment tax would result in a total loss ranging from $15.6 billion to $69.3 billion, which in turn would raise costs for consumers from $8.4 billion to $37.4 billion.

The Brattle Group report contends that both the Warner-Neal legislation and a border adjustment tax would decrease the supply of reinsurance and widen the gap between economic losses and insured losses. The study concluded that this gap, “If not properly managed, will fall almost surely on the government as an emergency relief safety net.”

One of the leading economic research consultancies with offices throughout the world, The Brattle Group provides rigorous analysis and economic research for US and international regulatory and government agencies. The study’s lead author, Michael Cragg, serves as the Brattle Group’s chairman, and has extensive consulting, research, and expert witness experience in corporate finance, financial services, and valuation. The study’s other authors, Dr. Bin Zhou and Jehan deFonseka, hold expertise in valuation, corporate finance, accounting, and served as consulting experts in high-profile securities, bankruptcy, and tax litigation. Further information on the study and its authors may be accessed at www.brattle.com.

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The Coalition for Competitive Insurance Rates is made up of business organizations, consumer advocacy groups, insurers and their associations. For more information on CCIR, please visit www.keepinsurancecompetitive.com.