US tax proposals would raise cost of catastrophe reinsurance
A new study from an American think tank is the latest development in proposals for a global corporate tax scheme that could threaten Bermuda’s international business.
But the report has concluded that Bermuda reinsurers are crucial to the United States’ ability to finance the costs of addressing climate change.
The public policy research organisation, R Street Institute, also said that if US president Joe Biden’s ‘Made in America Tax Plan’ passes as it is written – including proposed global tax regime changes deemed troublesome for Bermuda’s reinsurers – the cost of insurance will increase for everyone in the United States.
When the price of insurance increases, R Street said, less insurance will be purchased, increasing the need for federal emergency money.
The Biden plan, they say, raises the corporate tax rate from 21 to 28 per cent, directly increasing the tax burden on US insurers.
But it also proposes a global minimum tax regime of 15 to 28 per cent, also increasing tax on the very international reinsurers, often in low-tax jurisdictions, that provide substantial capital for US risks.
The new report by Lars Powell, Ph.D. is entitled: Estimating Potential Effects of the Global Minimum Tax on Catastrophe Insurance Markets.
It estimated insurance costs for US consumers would increase by between $10 billion and more than $20 billion a year.
It said, “Though these changes will affect the cost of insurance for all US consumers, the price increases will be largest for those living in areas exposed to catastrophe losses (e.g., hurricanes, earthquakes, tornadoes, floods and wildfires).”
The study comes after Category 4 Hurricane Ida caused power outages of more than a million people in Louisiana – the strongest storm to hit the state, it is estimated, in 165 years.
In a press statement about the report, R Street says: “Biden’s plan reaches beyond the United States. The nation relies heavily on foreign reinsurance markets because of its enormous exposure to natural catastrophes.
“Bermudian reinsurance companies in particular are crucial to the United States’ ability to finance the costs of catastrophes, exacerbated from the impacts of climate change.
“In fact, markets in Bermuda and Europe have historically provided protection for severe natural catastrophes as well as man-made catastrophes, such as the 9/11 terrorist attacks.
“Bermuda (re)insurers alone covered more than 30 percent of the $100 billion insured US losses caused by hurricanes Harvey, Irma and Maria in 2017.”
The report argues that driving insurance prices up will cause fewer families to buy, and therefore increase the need for government disaster aid through FEMA (the Federal Emergency Management Agency).
The author is an R Steet senior fellow and the director of the Alabama Center for Insurance Information and Research at the University of Alabama.
An associate editor for the Journal of Insurance Regulation. his work has also appeared in the Journal of Financial Services Research, Journal of Law and Economics, Journal of Risk and Insurance and the Risk Management and Insurance Review.
He is a member of the American Risk and Insurance Association and the Risk Theory Society.
Initially funded by the right, but also supported by the left, R Street Institute is a nonprofit, public policy research organisation which they say is engaged in policy research and outreach to promote free markets and limited, effective government.
The Institute is headquartered in Washington DC with offices in Georgia, Texas, Ohio and California and describes itself as non-partisan.
Their website says: “We work extensively on both state and national policy, and focus on issues that other groups tend to neglect. Our specialty is tackling issues that are complex, but don’t necessarily grab major headlines. These are the areas where we think we can have a real impact.”