US Tax Proposal Self Destructive to US Consumers

22 September 2010

Pending US tax proposals affecting foreign reinsurance will lead to higher insurance prices for US consumers. 

 

The Brattle Group, an economics consulting firm, in conjunction with J.David Cummins, Ph.d (Temple University’s Fox School of Business; and the Wharton School, University of Pennsylvania), released an economic analysis in May that demonstrated that if a proposal backed by US Rep. Richard Neal were to become law that it would reduce the available reinsurance capacity to US consumers by 20%.  The resulting loss in reinsurance, would diminish the capacity  to meet US consumer insurance needs and lead to price increases nationally of $10 to $12 billion annually.

 

The Neal bill, introduced late last year, and to be reintroduced this summer, would impose a tax on affiliated reinsurance transactions between US insurance companies and their international affiliates.  It applies to reinsurers domiciled anywhere – Bermuda, Europe, Canada or Japan.  The proposal is backed by a handful of large, self-interested US insurance companies who argue that the tax will level the playing field between US and foreign competitors.  The Brattle study conclusively shows that the tax is not about leveling the playing field but rather creating a tariff on international competition that will accrue to the substantial benefit of large US insurance companies.  The Brattle study also documents that US insurance groups use affiliated reinsurance to the same degree that non-US insurance groups do and thus concludes that business risk management – not tax – issues drive utilization of affiliated reinsurance.

 

The impact of the Neal tax proposal is to create a confiscatory tax equal to 25% of the subject affiliated reinsurance premium.  The effect of the tax will be to make nearly all affiliated reinsurance transactions uneconomic.  Although international insurers will try to substitute non affiliated reinsurance and capital for the affiliated reinsurance, both will be more expensive and, the Brattle study concludes,  there will be an insufficient supply of both to meet the international company’s needs.  As a result the US market will see a capacity shortfall and consumers will see price increases.

 

US consumers have seen such capacity shortfalls before.  They know they are not pleasant.  The US faced a shortfall of medical malpractice and products liability insurance in the 70’s, commercial liability coverage in the 80’s and property catastrophe coverage in the 90’s and earlier this decade. Of course, across the board, following the 9/11 tragedy global consumers faced insurance capacity shortfalls.  Rather than such capacity shortfalls being “event driven”, for the first time, the shortfalls would be driven by bad tax public policy decisions. The Brattle study notes that they’ve created national estimates for price increases on lines of business, but that they expect the consumer impact to be even greater in certain regions of the US. They expect the capacity constraints and prices increases to be concentrated in catastrophe prone hurricane states in the Southeast; in earthquake prone states like California and in large industrial states where business sectors need large lines for liability insurance.  On a national basis the price increase range from 1% to 16%.  The biggest impact will be on excess of loss liability reinsurance.

 

A coalition has been organized to oppose the Neal bill – it is called the Coalition for Competitive Insurance Rates.  It includes consume groups like the Risk and Insurance Management Society (RIMS), the Florida Consumer Action Network and the Consumer Federation of the Southeast, along with risk retention and captive insurance groups.  It also includes free market groups like the Competitive Enterprise Institute and many international insurers from Europe and Bermuda.  Government officials from Europe and state insurance regulators from the Southeast have also written in opposition to the tax proposal.  The Europeans cite violation of international trade commitments if the US proceeds with the tax and suggests retaliation against US insurers doing business outside the US is likely to follow.  Similar concerns about the potential for a trade war have been made by US trade experts – including former President Bill Clinton’s US Trade Representative Mickey Kantor.

 

The Association of Bermuda Insurers and Reinsurers opposes the Neal tax bill and along with leading European insurers and reinsurers have worked with the Coalition for Competitive Insurance Rates to oppose the legislation.  It is notable that the discriminatory reinsurance tax proposal is not included among the many international tax provisions cited in President Barack Obama’s 2009 budget, introduced in mid-May. The biggest threat US consumers face from the Neal bill is it being enacted as part of a revenue raising amendment added to an unrelated piece of legislation.  Thus opponents need to stay vigilant on a variety of spending and tax bills to make sure the amendment doesn’t become a last minute surprise.  If that happens the US consumers will pay the price.

 

 

Bradley L. Kading

President

Association of Bermuda Insurers and Reinsurers