R Street-Pelican study finds BAT would hurt Louisiana insurance market

BATON ROUGE, La. (May 4, 2017) – Applying a destination-based cash flow tax—better known as a “border-adjustment tax,” or BAT—to the import of reinsurance will cost Louisiana consumers an additional $1.11 billion in higher property-casualty insurance premiums over the next decade, according to a new report published jointly by the R Street Institute and the Pelican Institute.

Proposals like the BAT, reciprocal taxes, territorial taxes and discriminatory taxes on insurance affiliates all would affect insurers’ ability to use reinsurance to spread risk globally, and hence disproportionately harm consumers in catastrophe-prone states like Louisiana, authors Lars Powell, Ian Adams and R.J. Lehmann find.

“Louisiana’s insurance markets took nearly a decade to recover fully from the damage wrought by 2005’s Hurricane Katrina, the costliest insurance event in U.S. history,” the authors write. “But as Congress prepares to consider structural changes to the U.S. tax code, proposals that target international reinsurance would have adverse consequences that could undo that progress.”

The report’s projection is derived by examining the impact a BAT system would have on the supply of international reinsurance and calculating the effects that changes in price and availability would have on the state’s insurance market and policyholders. In addition to residential property insurance, Louisiana is heavily reliant on foreign insurance and reinsurance capacity to the oil and gas industry. Of the 40 insurance companies to report losses from 2010’s Deepwater Horizon disaster, 16 are based in Bermuda, 13 are European, nine are American, one is Australian and one is Japanese.

“Should Congress ultimately consider a BAT as part of an overall tax-reform package, it should note that developed nations that employ the conceptually similar value-added tax (VAT) system almost universally exempt financial services like reinsurance from the tax,” the authors write.

R Street is a nonprofit, nonpartisan public policy research organization whose mission is to promote free markets and limited, effective government. It has headquarters in Washington, D.C. and five regional offices across the country. Its website is www.rstreet.org.

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