By Christian Cámara
As appeared in Insurance Journal.
In recent years, Congress repeatedly has considered legislation that would have adversely and profoundly impacted disaster-prone states like Florida. Luckily, we were spared passage, over and over again. Unfortunately, a tax “reform” package supported by House Republicans and likely to be introduced soon may contain provisions that would do essentially the same damage.
Historically, these bills targeted reinsurance purchased by property insurers from affiliates located offshore. The key change would be to eliminate the U.S. subsidiary’s ability to write off the reinsurance costs from their corporate income. The measures long have been supported by a group of U.S.-based insurance companies, who sought to reduce competition they face from foreign insurers and reinsurers.
Damages from isolated incidents such as fires, thefts and hailstorms are normally paid directly by insurance companies. However, when a massive disaster like a hurricane strikes, reinsurance kicks in and covers the insurer’s losses beyond a pre-negotiated deductible. Changing the tax rules to punish international insurers would be particularly damaging for reinsurers, whose global scope allows them simultaneously to cover enormous risks like hurricanes in Florida and earthquakes in New Zealand, as they are uncorrelated and therefore unlikely to happen at the same time.
Given Florida’s vulnerability to hurricanes, the availability and affordability of reinsurance protection is critical to the state’s economic health and security. According to new research by the Brattle Group, the tax would raise home insurance premiums by 1.9 percent, or $282 million a year in added costs, and raise premiums for business insurance by 6.7 percent, or $367 million in added costs.
As President Donald Trump and House Republicans continue to discuss plans for corporate tax reform, Floridians should pay close attention to proposals for a “border adjustment tax,” which is pitched as a way to tax goods and services companies import, but not those they export. House Republicans have discussed adding this feature to their tax reform “blueprint” in order to dampen the immediate fiscal impact of reducing the federal corporate income tax rate.
The fear for Florida and other disaster-prone states is that financial services, including insurance and reinsurance, would be included in the definition of imported goods and services and thus subject to taxation. In 2011, the Florida Legislature became so concerned by the prospect of Congress enacting a proposal to tax the purchase of offshore reinsurance that it unanimously passed a memorial urging its rejection.
Indeed, Florida has a reason to be concerned about any proposal that taxes the purchase of reinsurance from offshore companies, as 91 percent of the state’s private reinsurance protection comes from such companies, along with 98 percent of the private reinsurance bought by the state-backed Citizens Property Insurance Corp.
According to the Brattle study, applying border adjustment to insurance and reinsurance would cut the amount of reinsurance available to the United States by between 20 percent on the low end and a whopping 80 percent on the high end. Across the country, regular consumers would have to pay $16.9 billion more to obtain the same basic insurance coverage they already have. Florida, which leads the country with $2.9 trillion of insured coastal property, would be hit the hardest.
There is, however, some good news. Most countries that have adopted a border adjustment tax system have zero-rated or altogether exempted financial services from such taxation. Congress should do the same.
Florida has among the highest property insurance rates in the nation, due in no small part to its vulnerability to hurricanes, as well as an increasingly litigious environment that the Legislature can and should address. The last thing it needs is for Congress to tax something that it relies on more than any other state.
Christian R. Cámara is R Street’s Southeast region director and a senior fellow and co-founder of the institute.