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.




Reinsurance Proposal to Muck with the Corporate Tax Base Resurfaces. It Still Doesn't Address Root Problems.

By Alan Cole

A tax proposal I’ve covered from time to time has resurfaced again as a possible revenue-raiser, introduced in the House and the Senate by Representative Richard Neal and Senator Mark Warner. This proposal, concerning reinsurance premiums, is doubly-concerning to me: it is not only misreads the specific industry it covers, but it is also part of a broader view of the corporate income tax that I deem misguided. In other words, it is wrong on both the particulars and in the general case.

The proposal essentially seeks to increase taxes on international casualty and property insurance. We’ll go into more detail on how it does that, both in terms of the numbers and in terms of the substance.

By the Numbers

By the numbers, this proposal is a tax increase, likely to raise a little bit under $1 billion a year in direct revenues. Its burden falls primarily on insured physical assets like homes, business equipment, business structures, and so on.

As an aside, taxing physical investments like this is bad policy. While I’m most interested in addressing larger points about tax bases here, I’m going to take a digression to talk about the costs of this kind of policy for a second. Adding to the tax burden on investment in physical capital in the U.S. is pretty much the exact opposite of most lawmakers’ goals; most like to talk about building more homes and businesses in the U.S., not less, and taxing that kind of tangible investment won’t help with that.

The last time this proposal popped up I ran it through the Tax Foundation Taxes and Growth Model. Over the long run, a proposal like this one would result in about $7.8 billion less in private business capital stocks, and $2.2 billion less in household business stocks. These combined forgone investments would result in a GDP about $1.4 billion lower.

Is this a good trade? Well, not really. It means that for every dollar the government gets, regular people lose about $2.40. One dollar goes to the government, and the other $1.40 is lost because of the foregone investments. There are far more efficient taxes than this, and I’d happily come up with a list of them for any reader who is curious.

But the numbers aren’t actually the main reason I’m not a fan of this kind of bill; the real problem is the substance.

By the Substance

The substance of the proposal is to eliminate the deduction to insurance companies for reinsurance premiums paid to foreign affiliated insurance companies if the premium is not subject to U.S. income taxation.  The proposal also provides an exclusion from income for reinsurance recovered from those same foreign affiliated companies.

In simpler words, this is essentially un-personing the entire foreign reinsurance industry, and instructing the U.S. tax code to act as if it doesn’t exist.

That sounds like a radical thing to do, so why was it proposed? Well, the proposal is an attempt to rein in what its proponents perceive as profit shifting. As Senator Warner writes in his statement:

As we continue to face a growing budget deficit, I am increasingly worried about the erosion of our U.S. tax base. The Congressional Budget Office estimates that over the next 10 years, corporate income tax receipts will fall by roughly 5 percent – with half of that difference attributable to the shifting of additional income out of the United States. This legislation will help stem the flight of capital and tax revenue abroad, and put all insurers on a level playing field. I am proud to introduce this legislation with Congressman Neal, who has championed this issue for many years.

That’s a fair problem to want to solve, and I sympathize with any lawmaker who wants to take it seriously. But here’s the problem with hassling this particular industry: this industry is obeying the U.S. corporate income tax code exactly as it was designed.

U.S. insurance companies appropriately deduct their expenses, such as premiums paid to reinsurers, and count their revenues, and pay their corporate income tax on their revenues. That’s what a corporate profit tax is and they’re doing it right.

Furthermore, spreading risk around to investors around the world is an essential feature of insurance companies, not a mere tax scheme. Insurance is supposed to reduce idiosyncratic risks for individuals by spreading them across large populations, so naturally the best insurance practices expand to a global scale in order to diversify the risks they take on.

These companies are doing everything right, and operating under an obviously-legitimate business model, and they’re being unfairly maligned.

The Way Forward

There’s some basis to Senator Warner’s feeling: lots of reinsurers help out U.S. companies, and if the ultimate insured product is in the U.S., then maybe, goes the logic, that business should be taxable. But that is the logic of sales or consumption or property taxes, not corporate income taxes. If you want a different tax than the corporate income tax, you should pass a different tax than the corporate income tax. Or at a minimum, you should broadly reform the corporate income tax with something called Sales Factor Apportionment, which would solve the problem of locating profits by divvying them up on the basis of sales, as Warner seems to want.

But if you’re going to do that, you need to do that for the whole economy in a single broad reform; you can’t go through the tax code industry-by-industry, making things up as you go and hybridizing the corporate income tax in ways that don’t make sense and aren’t consistent from industry to industry. All-too-often, lawmakers in the Obama era have opted for the latter. The corporate income tax has become a goofy-looking patchwork quilt as lawmakers and Treasury officials attempt ad-hoc fixes like this.

I wrote at the beginning of this post that the proposal is wrong on both the particulars and the general case, but perhaps I should have phrased it this way: the proposal is wrong on the particulars because it’s wrong on the general case. Representative Neal and Senator Warner are smart men, but they are operating on the faulty premise that the U.S. corporate income tax base is mostly okay, and with vigorous tinkering it will finally do what they want it to do. Loyalty to this mentality has forced lawmakers to contort tax principles beyond recognition (for example, by instructing businesses to ignore legitimate business expenses and revenues) in order to achieve their goals.

This proposal isn’t the way; a comprehensive business tax reform is.

Alan is an Economist with the Center for Federal Tax Policy at the Tax Foundation.


Tax reformers must take care not to kill reinsurance market

By Lori Sanders

During the 2016 presidential election, one theme from President-elect Donald Trump rang louder than any other: the importance of keeping jobs in America and finding ways to encourage (or perhaps force) companies that have sent jobs overseas to bring them back. The PEOTUS suggested countless ways to do so, from imposing tariffs to rolling back regulations to renegotiating trade deals.

While some of Trump’s ideas make congressional Republicans squirm, one place of firm agreement between the Republican in the White House and those in Congress is tax reform, and for good reason. Our nation’s corporate tax code combines the highest rates in the OECD with a complex system of loopholes and deductions to create a behemoth that only serves to drive businesses (and jobs) overseas.

But in their efforts to entice jobs back to our shores, Congress must be careful not to bring an outsized portion of insurance risk back with them inadvertently. The issue at-hand is a deduction for reinsurance premiums taken by U.S. companies who cede premiums to offshore affiliates.

An insurance company purchases reinsurance to help cover its losses in the case of unexpectedly high claims – for example, massive property damage in a region due to a hurricane. The ceding premiums as a business cost, and it becomes income for the reinsurer receiving the premium payments. If that reinsurer is based in the United States, those premiums are part of their U.S. taxable income. If an insurance company’s losses turn out to be high and their reinsurance contract kicks in, then the reinsurance payouts made can become a loss that is carried forward on future taxes. Obviously, if the reinsurer is foreign, they neither pay U.S. taxes on any income nor can carry forward any loss for reduced U.S. tax liability.

For more than a decade, bills have been introduced in each session of Congress to deny this deduction to U.S. insurers who purchase reinsurance from foreign affiliates. It’s also made it into the president’s budget for the last five years. Proponents of this change claim that it would reap billions in tax revenue, despite outside analysis that shows the federal revenues to only come to $440 million. It has been floated as a pay-for in recent tax-reform efforts, but never made it across the finish line.

This is fortunate, because proponents’ second claim is even more dangerous. Supporters of ending the deduction claim that these offshore reinsurance purchases are simply done for tax avoidance purposes, encouraging capital to fly overseas. However, this is simply not the case.

First, these purchases are screened and approved by insurance commissioners to verify that the purchase is legitimate, rather than for the purpose of income stripping. But second and more significantly, it’s incredibly important to the structure of the reinsurance system that risk is spread all over the globe. This helps reinsurers to diversify their exposure to any given geography or line of business, which would pose solvency concerns and require higher premiums to justify the increased risk. Under the global reinsurance system, when Louisiana is hit by a large hurricane or a devastating earthquake hits Japan, the capital needed to rebuild floods in from all over the world.

Discouraging the purchase of foreign reinsurance would obviously provide incentives for more reinsurance purchases from U.S. companies, but only by distorting the global risk pool and reducing competition. According to a study by J. David Cummins of the Wharton School, along with the Brattle Group, reinsurance costs could rise between $11 and $13 billion from this change.

It doesn’t stop supporters from continuing to press their case, however, and unfortunately for consumers, the chief architect of the legislation to end the deduction—Rep. Richard Neal, D-Mass.—soon will sit as the ranking member on the House Ways and Means Committee, which is charged with crafting U.S. tax policy. Also of concern is that House Republicans appear to be considering the proposal as part of their “blueprint” for tax reform – specifically in the context of a “border adjustment” system, in which all sales to U.S. customers are taxed and all sales to foreign customers are exempt.

Closing the outlandish number of tax loopholes riddled throughout our corporate tax code is a Herculean task, but one that is necessary to ensure lower corporate rates don’t drive up our already high national debt. However, the point of tax reform is to create a level playing field that attracts companies, jobs and products to our shores, and Congress should be wary of calls to disadvantage one segment of an industry over another.

Driving up the cost of insurance for consumers and increasing our exposure to risk from disaster is a wrongheaded way to pay for tax reform. After all, each of the companies we hope will expand their U.S. presence will need insurance. It would be a shame for them to not bring the jobs back due to higher operating costs created by the very tax reform intended to lower them.

Lori Sanders is outreach director and senior fellow at the R Street Institute.


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


Insuring a Sound Tax Reform Process

By Pete Sepp

“There’s good reason to be optimistic that tax reform can be done next year. That doesn’t mean we won’t have to put in the work.”

Those words from NTU’s President, quoted in a recent article from The Hill’sNaomi Jagoda, apply to numerous aspects, large and small, of getting the first major overhaul in 30 years of our complex and uncompetitive tax system to the finish line in 2017.

Although NTU will be weighing in a lot throughout the coming days about what’s ahead with tax reform, one key principle seems obvious: making sure that as the numbers behind any plan add up, the policies contained in that plan add up too. Keeping fiscal discipline is certainly important with tax reform, but sometimes the hunt for “offsets” against reductions in rates or other simplification measures can leave the law worse off than it was before.

There are many illustrations of this problem, but we were reminded of one longstanding example recently, when the Coalition for Competitive Insurance Rates reportedly alerted President-elect Trump to a legislative scheme that would effectively slap a tax on foreign affiliate reinsurance.

As regular readers in this space well remember, President Obama and his allies in Congress have for several years advocated to disallow or defer a normal business deduction for premiums that a US insurer pays to an international affiliate. This policy, described innocuously as a “revenue raiser,” would not only skew the Tax Code against foreign investment, it would also boost prices for consumers and make it more difficult for communities to recover from disasters. That’s because foreign reinsurance helps to broaden the capacity of the marketplace to absorb the costs of a mega-disaster. When that pro-market process is short-circuited, government bailouts become likelier and taxpayers suffer.

We are not alone in this assessment. Last year NTU helped lead an open letter to Congress signed by the R Street Institute, Taxpayers Protection Alliance, Associated Industries of Florida, and the American Consumer Institute warning that:

This provision [taxing foreign affiliate reinsurance] would amount to little more than a thinly disguised tariff proposal that could impose enormous costs on consumers and limit international trade. At a time when systemic tax reform is becoming more imperative, it is especially critical for Congress to avoid embedding further distortions into the law that will have long-term drawbacks and make the task of simplification even more difficult.

Research from the Tax Foundation determined that for all the rhetoric on the part of the tax hike’s supporters, the proposal “reduces GDP by about twice the revenue it collects directly.” Most recently, our friends at Americans for Tax Reform (ATR) weighed in against the reinsurance tax because it “needlessly picks winners and losers in the reinsurance industry by distorting the tax code in an economically destructive way.” As ATR’s Alex Hendrie observed, “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.” Changing that law to disallow or defer a deduction for foreign affiliates amounts to protectionism.

Discriminatory provisions against one particular industry or sector will often surface as leaders debate changes to the Tax Code. Avoiding these pitfalls will help lead to success on the road to tax reform next year.

Pete Sepp is the president of the National Taxpayers Union.


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.