American businesses and consumers rely on the availability of insurance services provided at competitive rates. The Coalition for Competitive Insurance Rates is made up of business organizations, consumer advocacy groups, insurers and their associations advocating for continued and increased competition within the insurance industry.

 

 

A proposal in President Barack Obama’s FY 2017 budget seeks to deny a tax deduction for reinsurance premiums paid to foreign affiliates by domestic insurers. The proposal closely resembles legislation introduced in Congress by US Representative Richard Neal (D-MA) and Senator Mark Warner (D-VA) that would drastically raise insurance rates across the country. The President’s budget proposal and the Neal-Warner legislation would impose an unnecessary and costly tariff on the companies that help spread insurance risks globally. This ability to spread risk has been especially beneficial for consumers and businesses in areas subject to hurricanes, earthquakes, crop failures and other forms of disaster.

More than 100 independent experts, state government officials, business owners, and associations have publicly filed opposition letters to these tax proposals. Additionally, two economic research firms, the Tax Foundation and the Brattle Group, have published independent studies pointing out the potential economic consequences of the proposals.

 

 


Tuesday
Nov292016

Reinsurance saved Florida from catastrophic losses

By Christian Cámara

As appeared in the Tallahassee Democrat.

While this year’s storms Hermine and Matthew brought an end to the state’s decade-long hurricane drought, they easily could have been stronger or cut a more destructive path.

Indeed, had Hurricane Matthew tracked just 20 or more miles farther west, it would have raked the entire east coast of Florida, bringing the full force of a Category 4 storm to the most populated and wealth-concentrated coastline in the region. Insured losses could have topped $35 billion.

That’s not to say the actual losses were trivial or insignificant. Thousands of homes and businesses were damaged, especially along Florida’s northeast coast. As of Oct. 27, the state reported more than 100,000 Hurricane Matthew-related insurance claims, and thousands more are expected to be filed in coming months. Ultimately, total losses are expected to reach $5 billion.

But thanks to responsible decisions made by Gov. Rick Scott and the Legislature over the past several years, coupled with trends in the global economy, homeowners are not expected to see insurance rate increases because of these storms.

Part of the luck Florida has experienced over the past decade is due to the reinsurance market. Reinsurance is insurance for insurance companies; that is, when an insurance company experiences catastrophic losses due to a major like a hurricane, its reinsurance protection kicks-in and pays out a pre-negotiated percentage of claims.

Due to a realignment in the global capital markets, reinsurance prices have plummeted over the past several years, ushering in a “buyers’ market” that insurance companies have used to export more of their risk abroad and write more policies at home. Lawmakers and state regulators took note of this trend. Among other important insurance reforms, they have allowed state-run Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund (Cat Fund) to purchase reinsurance protection and other risk-transfer products without raising rates on consumers.

Thanks to these investments, it appears the state is poised ultimately to receive an influx of $1 billion in foreign capital to help pay these hurricane claims. These same reports estimate this amount could double to $2 billion, since roughly 50 percent of aggregate claims amounts will be paid for by foreign reinsurance entities.

This is significant. If private insurance companies were responsible for a higher share of their losses, they would have to dig deeper into their surplus accounts, which have to eventually be replenished — usually through rate increases on their consumers when policies come up for renewal.

Current projections indicate that losses incurred by state-run Citizens and the Cat Fund will not trigger their reinsurance protection this time around. However, lawmakers and regulators alike should not forget how close Hurricane Matthew came to doing so.

When making their decisions to protect consumers, the state’s property insurance market and taxpayers, Florida policymakers should not assume the next bullet will merely graze us like Matthew did.

Christian Cámara of the R Street Institute is a member of the Stronger Safer Florida Coalition

Wednesday
Oct262016

Congress Should Not Use the Tax Code to Pick Winners and Losers in the Reinsurance Industry

By Alexander Hendrie

Congressman Richard Neal (D-MA) and Senator Mark Warner (D-VA) recently introduced legislation (H.R. 6270 and S. 3424 respectively) that needlessly picks winners and losers in the reinsurance industry by distorting the tax code in an economically destructive way. While supporters of the legislation claim it would close a “loophole” in the tax code, it would do no such thing and would instead make the code more complex, while decreasing choice and increasing prices in the reinsurance industry.

Property and casualty insurers commonly purchase reinsurance as a way to spread risk so that no single insurer is overly exposed in the face of disaster. Under federal law, insurers are permitted to deduct from taxable income any premiums paid to a reinsurance provider. This makes perfect sense because it is a necessary business expense indistinguishable from any other.

The proposed legislation removes this business deduction only for foreign reinsurers based on the argument that foreign firms are using the deduction to shift profit outside the U.S. 

But this is argument misses the mark -- profit shifting concerns are not justified here. Reinsurance transactions are already heavily regulated to ensure the rules aren’t abused. Even if this were the case, the solution should not be to treat identical business purchases differently under the tax code based on the location of the reinsurer. 

Not only is this proposal protectionist, but it would make the code more complex, would arbitrarily picks winners and losers, and hurts the economy and consumers. Given it raises a miniscule amount of revenue, it is not a serious pay-for especially after accounting for the economic damage it causes.

Doesn’t Fix the Problem that Supporters Claim: Supporters of this proposal argue that reinsurance profits ending up outside the U.S. means that insurers are shifting profit to minimize taxes. This is not the case. By its nature, reinsurance is an industry that spreads risk across the globe, therefore profit (and loss) will naturally spread outside U.S. borders. In addition, reinsurance transactions are already subject to heavy scrutiny by IRS auditors to ensure they do not abuse discrepancies in international tax law to shift profit outside the country.

Makes the Tax Code More Complex: Tax policy should treat all economic decisions neutrally by minimizing the number of distorting credits and deductions in the code so that decisions are made based on economic growth. Current law over reinsurance premiums already treats business decisions equally, so H.R. 6270/S. 3424 would create more complexity in the code and encourage insurers to arbitrarily treat purchases differently based on the country of purchase.

Reduces Consumer Choice and Increases Reinsurance Prices: Changing the tax code in this way will distort the reinsurance market by giving domestic reinsurers an artificial advantage. This will narrow the choices available to insurance companies and consumers leading to decreased competition and higher prices. According to research by the Brattle Group, this proposal could reduce the supply of reinsurance by as much as 20 percent, and increase costs to American consumers by $11 to $13 billion due to higher prices.

Hurts Economic Growth: According to research by the Tax Foundation, this change would reduce GDP by $1.35 billion over the long term, due to increases in the cost of capital. As noted by the study, every additional dollar in revenue would come at the cost of more than four dollars to the economy. Equal treatment of foreign and domestic reinsurance allows consumers to spread the risk in an economically efficient way, but the proposed change creates unneeded market distortions.

Raises a Miniscule Amount of Revenue: Congress is continually on the hunt for “pay-fors” as a way to offset tax reform proposals. Because this proposal is so damaging to economic growth, it would raise a miniscule amount of revenue and is essentially useless as a tax reform pay-for. After accounting for negative economic feedback, the proposal would raise just $4.4 billion over a ten-year period. Over that same period, federal revenues will total $41.7 trillion according to the Congressional Budget Office. The damage this proposal will cause to the economy and to property and casualty insurers far outweighs any benefit it may have as a tax reform pay-for.

Alexander Hendrie is the Federal Affairs Manager at Americans for Tax Reform.

Thursday
Sep292016

Warner-Neal Foreign Reinsurance Legislation Opposed by Bipartisan Coalition 

Bills would stifle competition and consumer access to affordable insurance

Washington, DC (September 29, 2016) -- The Coalition for Competitive Insurance Rates (CCIR), the leading voice for continued and increased competition within the insurance industry, today vocalized their disapproval of legislation introduced by Sen. Mark Warner (D-VA) and Rep. Richard E. Neal (D-MA) (S. 3424 and H.R. 6270) to raise taxes on foreign-based companies providing reinsurance to US affiliates. Despite strong opposition from concerned insurers, business, industry and consumer groups and elected officials, this legislation marks the fourth time Rep. Neal has sought to impose this special punitive tax.

“Foreign-owned reinsurers don’t enjoy any US tax loopholes,” said Tom Feeney, president and CEO of Associated Industries of Florida. “Right now, the US subsidiaries of these companies are subject to the same income tax laws as their US-based competitors – there is no differential or preferential treatment. By limiting US domestic insurance capacity, Sen. Warner and Rep. Neal will only succeed in driving up costs, placing a huge burden on homeowners and businesses, particularly those in areas that are vulnerable to devastating weather events or other significant catastrophes.”

The legislation introduced by Sen. Warner and Rep. Neal would defer or deny a deduction for certain reinsurance premiums paid by a US insurer to an international affiliate by imposing an unnecessary and costly tariff on the companies that help spread insurance risks globally – unduly harming American consumers and businesses. A 2015 report issued by the Tax Foundation on the consequences of a tax on the foreign reinsurance industry found that United States’ GDP would experience $1.35 billion in losses over the long term, which is approximately twice the revenue it would collect. In an economic impact study of previously introduced legislation by Rep. Neal, the Brattle Group, a leading economic consulting firm, found such legislation would reduce the net supply of reinsurance in the US by 20 percent, forcing American consumers to pay a total of $11 to $13 billion a year more for their same coverage.

Recognizing the economic disadvantage of this 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 Utah have publicly criticized the measures, as have agriculture commissioners from Florida, North Carolina and Tennessee, and Florida Governor Rick Scott.

“A tax on affiliate reinsurance will stifle innovation in an important industry and drastically reduce competition in the marketplace,” said Pete Sepp, president of the National Taxpayers Union. “American consumers and companies benefit from a competitive, secure insurance market, as do taxpayers. Global reinsurers are financially strong and have substantial capacity to support US insurance companies, allowing our communities to recover more quickly from disasters with fewer government aid dollars.”

Overseas reinsurance companies are the largest providers of US property catastrophe reinsurance and also provide catastrophe-exposed insurance via US subsidiaries. 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.

“Over the years, international insurance companies and their US subsidiaries have supported the US in the wake of our nation’s most tragic and costly disasters,” said Eli Lehrer, president and co-founder of the R Street Institute, a free-market think tank. “If affiliate reinsurance is taxed at a higher rate, companies may substitute non-affiliate reinsurance or reduce their US customer base. And, if the available supply of reinsurance shrinks, or markets become less competitive prices will rise – a losing equation.”

The Warner-Neal legislation closely resembled a provision in President Obama’s FY 2017 budget that would deny a routine business tax deduction for certain reinsurance premiums paid to foreign-based affiliates by domestic insurers – the seventh attempt by the president to introduce this specific budget recommendation.

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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 visitwww.keepinsurancecompetitive.com.

Media Contact:

Emily Flynn Pappas

Podesta Group

202-448-5208

epappas@podestagroup.com

Wednesday
Aug172016

Arthur Laffer: Let’s Get The Economy Moving Again With Uniform And Understandable Tax Cuts

When the American economy is stuck in a rut, how do we get it moving again?

We know the route to recovery: Cutting tax rates, closing loopholes, and broadening the base to encourage working and saving, building businesses and creating jobs.

I’ve seen such strategy work before, and I know we can do it again. In 1980, I served as an economic adviser to presidential candidate Ronald Reagan. With the unemployment rate above 7 percent and inflation rates well into double-digits, Reagan proposed tax rate cuts to boost the incentives for production, output and employment.

The results: A landslide for Reagan who had been dismissed by Democratic Party stalwart Clark Clifford as an “amiable dunce.” After Reagan’s economic reforms took effect, economic growth soared.

Growth was so great that Reagan’s economic policies won bipartisan support. After the initial cuts in 1981, his tax reforms received support from many leading Democrats, including Sen. Bill Bradley of New Jersey and Rep. Richard Gephardt of Missouri.

Even before President Reagan, we saw tax rate cuts prove their prowess. Just as Reagan ignited the economic boom of the 1980s, President Kennedy’s tax rate cuts produced the economic growth of the 1960s that was so robust we refer to the era as the “Go-Go 60s.”

Fast-forward to today. The economy is mired in the slowest recovery since the Great Depression. Our tax policy, that has proved to be so tragic, reserves special favors for special interests and targets punitive taxes at their competitors.

Revving the economy up once again to the booms of the 60s and 80s requires smart policies, not narrow partisanship.

As Americans debate tax issues, the stakes couldn’t be higher, and the choices couldn’t be clearer. After cutting the corporate tax rate from 46 percent to 34 percent in 1986, the United States had about the lowest corporate income tax rate in the Organization for Economic Cooperation and Development (OECD). In fact, our success with the corporate tax rate cut inspired our competitors to cut their corporate tax rates, too. Eventually, the average corporate tax rate in the OECD was lowered far below the rate in the U.S.

However, today, contrary to where we started 30 years ago, the U.S. has the highest corporate tax rate in the OECD. But, because companies — just like people — go to great lengths to reduce their tax burdens, the U.S. also has some of the lowest corporate tax revenue collected as a share of gross domestic product of any OECD country. That is why it is so important for the U.S. to have one of the world’s lowest corporate tax rates again, so that companies will focus on creating products and providing services rather than specializing in gaming global tax codes. 

As America cuts corporate taxes, we also need to avoid special interest provisions that reward some sectors and punish others, often under the guise of supporting American companies against their competitors.

Here’s a prime example of the protectionism that distorts the tax code and derails economic growth:

As in previous years, President Obama is supporting a proposal by Sen. Robert Menendez (D-NJ) and Rep. Richard Neal (D-MA) to defer or deny U.S.-based, foreign-owned insurance companies the standard business cost deduction for a basic expense.

Insurance companies buy backup coverage — or “reinsurance” — to spread the risk for potential major losses, such as earthquakes, hurricanes or airplane crashes. By US insurers purchasing this reinsurance from foreign affiliates, insurance companies can pool the risk of hurricanes in Florida and earthquakes in California with natural disaster risk from Europe and Asia. They diversify their portfolio while matching risk with their capital.

Revealing its protectionist purposes, the Menendez-Neal proposal would deny or defer the deduction for buying reinsurance from overseas affiliates to foreign-owned, but not US-owned, companies. This is a textbook case of bad tax policy: Creating a high tax rate on a narrow tax base, instead of a low rate on a broad base. It would also leave American insurance companies vulnerable to protectionist retaliation in other countries.

Worse yet, this punitive measure ignores the basic economic principle that, when government imposes a punitive tax on a product, consumers get less of it and pay more for it. In a study of a previous version of the proposed legislation, the economic consulting firm Brattle Group estimated that the supply of primary insurance in the U.S. would decline by between $11.2 billion and $11.7 billion as a result of this special surcharge. Meanwhile, American businesses and individuals would have to pay between $11 billion and $13 billion more for insurance coverage.

Because insurance is so essential to the economy, the nation would lose an estimated $4.07 in gross domestic product for every $1 that the federal government would gain in additional tax revenues from this proposal, according to an expert Tax Foundation analysis.

This trend from the Menendez-Neal proposal follows the detrimental trend of other protectionist economic policies, creating an environment that discourages foreign direct investment, competition and hinders economic growth.

In a free-market economy, taxes should fund the government without being so complex that they pick winners and losers, so steep that they discourage work and investment or so uncompetitive that they compel companies to move their tax domiciles overseas.

Instead of punitive taxes on politically targeted companies, America needs uniform, unbiased and understandable principles for defining the corporate tax base. Moreover, we need to make the tax code internationally competitive, with lower marginal tax rates. Now, as in the past, that is the proven way to build businesses, generate jobs and increase incomes.

We know the roadmap. Now, let’s get America moving again.

Tuesday
Feb092016

FY 2017 Budget Provision to Tax Foreign Insurers Opposed by Bipartisan Coalition 

President’s budget would reduce competition and consumer access to affordable insurance

Washington, DC (February 9, 2016) -- The Coalition for Competitive Insurance Rates (CCIR), the leading voice for continued and increased competition within the insurance industry, today condemned an inequitable provision in President Obama’s FY 2017 budget that would deny a routine business tax deduction for certain reinsurance premiums paid to foreign-based affiliates by domestic insurers. This is the seventh attempt by the president to introduce this specific budget recommendation, despite fervent opposition to the proposal in previous sessions.

“These reinsurance tax schemes are writ large attempts at special interest protectionism,” said top economist Arthur Laffer, who in 2015 published a study, "Do We Want Special Interest Trade Protectionism in the Tax Code?," that warns that what amounts to a reinsurance tariff would result in a capital reduction of nearly $10 billion, as well as a further drop in GDP due to foreign trade retaliation. “Denying this standard business expense deduction will push firms out of the marketplace, reducing coverage and increasing costs for consumers.”

President Obama’s budget measure, which closely resembles legislation (H.R. 2054 and S. 991) proposed in the 113th Congress by Reps. Richard Neal (D-MA) and Bill Pascrell (D-NJ) and Sen. Robert Menendez (D-NJ), would result in a tax increase  on reinsurance companies responsible for maintaining affordable business and consumer access to insurance by spreading risks globally. This proposal has remained under active consideration in Congress, having been included in former Ways and Means Committee Chairman Dave Camp’s (R-MI) tax reform legislation (H.R. 1) in 2014; but it was not proposed by the Senate Finance Committee’s International Tax Reform Working Group in 2015.

In a letter sent today from CCIR to the chairmen and ranking members of the US Senate Finance and House Ways and Means Committees, 31 concerned insurers, business, industry and consumer groups expressed anxiety over the unintended probable consequences of such proposals.

“A tax on foreign affiliate reinsurance will stifle the reinsurance industry and drastically reduce competition in the marketplace,” said Tom Feeney, president and CEO of Associated Industries of Florida, a signatory of the CCIR letter. “Limiting U.S. domestic insurance capacity will drive up costs, placing a huge burden on homeowners and businesses. This tax would benefit few at the expense of many, including home owners, insurance companies and small business owners.”

A growing chorus of state and federal officials from across the political spectrum has vocally opposed the reinsurance tax proposals. Current and former state insurance commissioners representing Florida, Georgia, Louisiana, Mississippi, Nevada, North Carolina, Pennsylvania and South Carolina have publicly criticized the measures, as have agriculture commissioners from Florida, North Carolina and Tennessee, and Florida Governor Rick Scott.

A 2015 report issued by the Tax Foundation on the consequences of a tax on the foreign reinsurance industry found that United States’ GDP would experience $1.35 billion in losses over the long term, which is approximately twice the revenue it would collect. In an economic impact study of previously introduced related legislation by Rep. Neal and Sen. Menendez, the Brattle Group, a leading economic consulting firm, found such legislation would have reduced the net supply of reinsurance in the US by 20 percent, forcing American consumers to have paid a total of $11 to $13 billion a year more for their same coverage.

As the Laffer study concludes, “Good tax reform promotes a tax code with the lowest possible tax rate on the broadest possible tax base. Instead, the Obama/Menendez/Neal proposal to eliminate the deduction for foreign reinsurance premiums follows the exact opposite path, applying a high tax rate to a very narrow tax base – a targeted and specific industry. The known result—surely accompanied by a number of unanticipated consequences as well—will be that domestic insurers use less foreign affiliate reinsurance, which will result in less tax revenue than expected and more expensive, less effective insurance.”

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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.

Media Contact:  
Emily Flynn Pappas  
Podesta Group  
202-448-5208  
epappas@podestagroup.com