31 01 2017

Study Shows Impact Of US Foreign Reinsurance Bill

Brattle Group, a provider of consultancy services and expert testimony, has updated its economic impact study of legislation introduced into the US Congress to close the so-called "tax loophole" said to provide foreign-owned insurers with an opportunity to obtain a significant advantage over their American competitors.

The legislation would eliminate the perceived competitive advantage for foreign-owned insurers, by deferring their tax deduction for any reinsurance premiums paid to a foreign affiliate (if the premium is not subject to US tax) until the insured event occurs.

However, the Brattle study, released on January 23, pointed out that "the key function of reinsurance is risk-pooling to lower insurance company risk through global diversification. … The reinsurance market is global because insurers need diversification across the widest possible geographic area."

The study found that the legislative proposals would, particularly for catastrophic risks, drive up consumer insurance rates by reducing competition and critical US insurance capacity. "The legislation," it stated, "would increase the cost of providing insurance for lines in which there can be a significant time lag between the initial reinsurance transaction and when the reinsurance recoverable is received ('long-return' risks)," such as natural disasters, product liability, and workers' compensation.

It found that "the net supply of reinsurance (non-affiliate and affiliate combined) would drop by one-eighth or USD18.3bn as a result of the proposed tax [change]. … We estimate that US consumers would have to pay USD5bn more per year to obtain the same coverage. In percentage terms, the proposed tax would increase the price of insurance by 0.8 percent, on average, and as much as six percent in some insurance lines."

"Corresponding to the reduction in insurance supply and the increase in insurance price," the study added, "insurance coverage (for future losses and expenses) would drop by 2.2 percent, on average, and as much as 17 percent in some lines of business. Certain states like Texas and Florida where low-frequency, high-impact risks are concentrated would see prices rise as much as three percent."

"Our analyses show that the new proposals would lead to a degradation of the ability of firms to manage risk," Michael Cragg, Principal and Chairman of The Brattle Group, said. "It would widen the protection gap between insured and uninsured losses, which would result in the excess risk falling on the Government, particularly for natural catastrophes and other high-loss events."