R Street Institute policy study: Impact on the New Madrid zone of taxing reinsurance transactions

WASHINGTON (Sept. 12, 2017) – Over the last several weeks, Hurricanes Harvey and Irma have ravaged Texas and the East Coast, prompting discussion among policymakers about how best to prepare for and finance recoveries from natural disasters. In the next installment of our seven-part series on reinsurance taxation is a new paper by R Street’s Lars Powell, Ian Adams and R.J. Lehmann examining how cross-border taxation would impact the New Madrid Seismic Zone, which covers an eight-state area in the interior of the continental United States.

While a tax reform proposal is currently being ironed out between the White House, the Treasury Department, the House and Senate, one thing is certain: Congress should avoid taxing cross-border reinsurance purchases. Subjecting cross-border reinsurance purchases to taxation will curtail our ability to spread risk globally, since it is estimated that roughly half of Hurricane Harvey’s recovery costs will be paid for by global reinsurance companies. The benefit to American companies and taxpayers cannot be overstated.

“It’s important to bear in mind that, under the current system, insurance companies don’t just import reinsurance – they also export risk,” note the authors. “Denying insurers the ability to engage in responsible risk transfer would mean concentrating those risks here on our shores.”

Of the states in the New Madrid Seismic Zone, three stand out in their exposure to seismic risk: Arkansas, Missouri and Tennessee. If Congress decided to subject cross-border reinsurance purchases to taxation, the authors estimate that the impact to consumers within the New Madrid Seismic Zone would be an additional $740 million in higher property-casualty insurance premiums over the next decade. This would have a significant impact on the ability of consumers within the zone to obtain coverage affordably.

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