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Friday
Sep152017

Op-ed: A hurricane tax? You cannot be serious

By Ian Adams

As appeared in Crain's New York Business

In the midst of the most active hurricane season in recent memory, Congress is contemplating tax reform measures that could lead to an additional $1.21 billion in property-casualty insurance premiums for New Yorkers over the next decade. Given the ever-present—and potentially growing—risk of climate-related catastrophe, this could not come at a worse time.

The New York estimate comes from a new study by the R Street Institute concerning the projected impact of new taxes on cross-border reinsurance transactions, such as a territorial tax, a discriminatory tax on insurance affiliates or a full or partial border-adjustment tax. All of these taxes share a common characteristic: They hinder the ability of insurers to spread their risks globally, making premiums more affordable. The affordability of insurance bears directly on the ability of a region to recover from the types of natural disasters too frequently battering the eastern U.S.

On the heels of Hurricane Harvey, Hurricane Irma’s devastation of Florida is still being assessed and tallied. While it will take the Sunshine State years to recover, the Southeast is not alone in its experience. New Yorkers are also familiar with storm-born devastation and the process of recovery. In fact, New York is one of the states most vulnerable to hurricanes, severe storms and flood risk. Only five years ago Hurricane Sandy wreaked $9.6 billion worth of destruction on New York alone. Three of the costliest hurricanes in U.S. history (Ivan, Frances and Sandy) directly affected New York.

While recovery after a catastrophic event is a multiyear process, it can be sped along by the availability of private capital. The Northeast’s rapid recovery from Sandy was made possible largely by the availability of affordable private insurance, which depends on reinsurers' ability to spread risk internationally. Again, this is because diversifying risk across the globe allows reinsurers to hedge against the occurrence of multiple events at the same time.

For instance, a reinsurer may bundle New Zealand earthquake coverage and Japanese tsunami coverage with New York wind and flood coverage to offer rates that are lower than would otherwise be possible if only a single risk were on that reinsurer’s book.

The reason New Yorkers ought to care about these seemingly obscure machinations of international finance is that the primary insurers—the ones that advertise nonstop during Giants and Jets games—rely on reinsurers to make their property coverage possible. As in other states and regions exposed to major natural disasters, insurers that do business in New York cede a large volume of risks to foreign reinsurers.
Thus, New York, like these other states, would experience dramatically higher insurance premiums under tax systems disallowing deductions for cross-border reinsurance transactions because the price of reinsurance purchased by primary insurers would increase. Such changes to the tax code would therefore disproportionately harm consumers' ability to secure insurance coverage for their homes, cars and businesses.

While it may be tempting for Congress to seek revenue by taxing cross-border reinsurance transactions, the costs to consumers in New York would be felt elsewhere, and, at $1.21 billion over 10 years, are substantial. In fact, congressional tax reform could reduce the availability of coverage necessary to recover from hurricanes. To avoid such a scenario, tax reform must avoid the inclusion of punitive insurance taxes against offshore capital that allows distribution of risk around the globe. If it doesn’t, New York is getting a bad deal.

Ian Adams is associate vice president of state affairs with the R Street Institute, a nonprofit, nonpartisan think tank located in Washington, D.C.