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An Unnecessary Insurance Burden
An Unnecessary Insurance Burden
June 11, 2009
Originally published in The Mississippi Sun Herald
As it girds for the busy months of hurricane season, Mississippi has plenty to worry about. Homeowner’s insurance coverage remains difficult to find and expensive for those who have it.
If that weren’t enough, some members of Congress now want to change the tax law in a way that would drive already expensive coastal Mississippi insurance premiums even higher.
The proposed new tax will impact “offshore affiliated reinsurance” — a rather esoteric product that matters a lot in Mississippi. Explaining why requires some background. To begin with, all sizeable primary insurers — companies like Allstate, Farm Bureau, Nationwide and State Farm — buy insurance of their own, reinsurance, to help cover particularly large losses and diversify their own portfolios.
Particularly in high-hurricane-risk areas like the Gulf Coast, many companies find it advantageous to buy some or all of their reinsurance from a parent or sister company that they know won’t abandon them following a major storm.
Many insurers doing business in Mississippi buy their reinsurance from offshore companies that have headquarters outside of the United States.
Spreading risk globally lowers costs
The existence of these companies benefits everyone. Through international markets Mississippi‘s hurricane risk gets pooled with Indonesia’s risk of cyclones. Since the events never occur at the same time — the storm seasons occur at different times of the year — the reinsurance costs less.
Offshore reinsurance competition drives down prices and, in some cases, “affiliated” reinsurance from a sister company proves the best deal of all.
Right now, international and U.S. reinsurance transactions are taxed at about the same overall rates. Sometimes U.S. companies get a better deal and sometimes companies with headquarters elsewhere do a little better.
But this could change: A proposal winding its way through Congress, sponsored by Rep. Richard Neal, D-Mass., would impose an enormous tax on these international-affiliated reinsurance transactions, which would place non-U.S. companies at a huge disadvantage. This would force many offshore companies to write less coverage or even withdraw from the Mississippi market altogether.
Although U.S.-based reinsurers would take advantage of this by selling more reinsurance to other U.S. primary insurers (including their own affiliates) they still have limited capacity. As a result, primary insurers that couldn’t buy enough reinsurance would have to raise rates and reduce coverage in order to build the financial cushion they typically get from affiliated offshore reinsurance.
And consumers would pay the tab.
The economic research and consulting firm the Brattle Group has estimated that, under Neal’s proposal, total reinsurance capacity would fall 20 percent and insurers would have to raise premiums by an estimated $10 billion to $12 billion to give them the cushion they would otherwise have if they could buy enough reinsurance. Mississippi residents who live near the coast would bear a disproportionate chunk of this bill.
Mississippi Insurance Commissioner Mike Chaney has come out strongly against the tax.
Federal benefit is questionable, at best
Because international insurers would probably stop doing business in the U.S. rather than pay the tax, the federal government wouldn’t get much revenue. Even worse, some European officials have threatened a trade war over the issue.
Raising taxes on offshore-affiliated reinsurance is bad idea. If Rep. Neal’s bill moves forward, Mississippi homeowners will see their insurance bills soar. Members of the Mississippi congressional delegation should follow the advice of their commissioner of insurance on this issue and tell their colleague from Massachusetts to stop tinkering with the federal tax code.
Hurricane Katrina hurt Mississippi badly enough. Congress needs to avoid tax law changes that could make things even worse.