Buried on Page 161 of the Obama administration’s 2011 budget is the obscurely labeled tax proposal entitled “deduction disallowance for excess non-taxed reinsurance premiums paid to affiliates.” It could cost Floridians billions of dollars over the next few decades while generating only about $50 million in federal revenue per year.
Explaining the tax proposal and how it impacts consumers requires background in how insurance and reinsurance work. To begin with, “primary” insurers that cover homes and businesses buy insurance of their own — reinsurance — to diversify risks and protect against big disasters like hurricanes.
Most U.S. reinsurance comes from offshore companies that often insure against events (like Tokyo earthquakes and UK floods) that probably won’t happen simultaneously with disasters in the United States. Insurance companies can profit off one type of coverage when they lose money on another. Obama’s new budget would give U.S.-based companies an advantage by imposing a burdensome tax on many offshore companies’ reinsurance transactions, destroying their diversification business model, while allowing deductions for the same sort of transactions by U.S.-based companies.
While the tax would produce higher profits for some U.S. companies, it’s likely to be a disaster for Florida consumer companies that rely heavily on offshore reinsurance. They would find their U.S. profits taxed away and have to downsize or withdraw from the U.S. market altogether, encouraging the U.S.-based reinsurance companies to raise their prices.
Consumers would simply end up paying these higher costs themselves. A 2009 report from the actuarial firm The Brattle Group estimated that a proposal similar to the Obama administration’s would raise U.S. insurance prices by $10 billion, Florida’s share of that being $550 million. Since most insurers in the state (102 out of 201 according to the Office of Insurance Regulation) lost money in 2009, even a relatively small increase in costs might well push more companies out of the state altogether, thus eliminating competition.
And Florida’s taxpayers — already on the hook for more than $20 billion in unfunded coastal insurance liabilities — could see their potential costs soar. Today, about one Florida homeowner in five buys insurance from the state-run Citizens Property Insurance Corp., and everybody who has analyzed the situation agrees that this is too many. If the new tax comes into effect and private companies flee the state, the percentage of homeowners getting reinsurance via Citizens could easily double within a few years. Businesses and nonprofits — which are usually ineligible for Citizens coverage — could find it impossible to buy property insurance at any price.
Floridians have a lot to lose if the new reinsurance tax becomes law. Gov. Crist, every member of the Legislature, and most importantly, every member of the state’s congressional delegation should speak out against the proposal. Florida can’t afford it.
Eli Lehrer is a senior fellow and director of the Center on Risk, Regulation, and Markets at The Heartland Institute, and Sean M. Shaw is Florida’s insurance consumer advocate.