Bad Idea Blowing an Ill Wind for Insured

The Texas Windstorm Insurance Association has ended up at the brink of insolvency paying Hurricane Ike claims. Insurers operating near the coasts have begun to cut back on coverage and make noises about leaving the state.

If that wasn’t enough, some members of Congress now want to change tax law involving “offshore affiliated reinsurance.”

All sizable primary insurers buy reinsurance to help cover particularly large losses. (TWIA itself purchased about $1.5 billion in reinsurance before Ike.) Many find it advantageous to buy from a parent or sister company they know won’t abandon them after a major storm.

Most reinsurance companies have headquarters outside the United States. Like most U.S. insurers, TWIA buys most of its reinsurance from these “offshore companies.” This benefits everyone. Through international markets, Texas’ hurricane risk is pooled with Indonesia’s risk of cyclones. Because the events never occur at the same time, reinsurance costs less. Offshore competition drives down prices.

International and U.S. reinsurance transactions are taxed at just about the same overall rates. But a proposal winding its way through Congress would impose an enormous tax that would force offshore companies to write less coverage or withdraw from the Texas market altogether. U.S. based reinsurers have limited capacity. As a result, primary insurers that couldn’t buy enough reinsurance would have to raise rates and reduce coverage to build the financial cushion they typically would get from affiliated offshore reinsurance.

The economic research firm the Brattle Group has estimated that total reinsurance capacity would fall 20 percent and insurers would have to raise premiums by an estimated $10 to $12 billion to give them this cushion. Texans who live near the coast would pay a lot of this — at least $350 million. Because Gulf Coast counties rank among the state’s poorest, already disadvantaged Texans would see premiums soar. International insurers would probably stop doing business in America, rather than pay the tax, so 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 a bad idea. Texans would see their homeowners’ insurance bills soar.

Texas’ Congressional delegates should tell their colleague from Massachusetts to stop tinkering with the federal tax code. Ike hurt Texas badly enough. Congress needs to avoid tax-law changes that could make things even worse.