The following op-ed was co-authored by Kory Swanson, president and CEO of the John Locke Foundation.
A controversial proposal Congress is considering as part of comprehensive tax reform could lead to $800 million in higher insurance premiums for North Carolinians over the next decade. In addition, this reform, if enacted, would further destabilize North Carolina’s already teetering property insurance market, where nearly one in 10 policyholders get coverage from taxpayer-backed entities.
That estimate comes from a new study jointly published by the John Locke Foundation and the R Street Institute on the projected impact of a border-adjustment tax. The “BAT” proposal is a part of House Republicans’ “Better Way” tax-reform plan. It would see U.S. corporations pay tax on domestic sales, but not international sales, and would allow them to write off the cost of goods and services bought from other U.S. companies, but not those purchased from abroad.
For North Carolinians, the problem with such a proposal is that the state’s property insurance companies rely heavily on reinsurance—insurance for insurance companies—written abroad. Eliminating insurance companies’ ability to write off the expense of international reinsurance would make it more expensive and less available. Both effects would seriously disrupt the state’s insurance market.
Reinsurance is a difficult business that requires an international scale because the risks often are enormous. Reinsurers seek geographical diversity from around the globe to hedge that risk. Earthquakes in Japan and floods in England are bundled together with hurricanes in North Carolina to offset the cost of insuring each.
Because a BAT-like tax would hinder insurers’ ability to spread risk around the globe, it would hurt disaster-prone states like North Carolina. The Tar Heel State was home to the fourth-highest total of insured catastrophe losses in the United States in 2016, at $972 million.
That total is of particular concern because, in the past five years, North Carolina has seen a massive expansion in its residual markets. Residual markets provide an option for consumers who are otherwise unable to obtain coverage in the private market at a “reasonable” price. When claims are too high, residual markets must borrow money to make up the difference, which can only be paid off by laying assessments on all policies across the state. A decrease in the supply of reinsurance, or more expensive reinsurance, means less available and more expensive primary insurance, which makes residual markets larger and subjects North Carolinians to greater exposure in the event of a catastrophe.
While the national trend the past 10 years has seen shrinking residual property insurance markets, North Carolina’s residual plans—the Beach Plan and the FAIR plan—have grown quickly. In 2011, the Beach Plan represented 3.37 percent of the state’s market. By 2015, that percentage had grown to 7.03 percent. The FAIR Plan went from 0.62 percent in 2011 to 2.16 in 2015. Together, the two plans account for 9.19 percent of the state’s market. This expansion has made an already unstable property insurance market even less reliable.
This trend is further exacerbated by North Carolina’s problematic rate bureau system, which limits insurers’ ability to establish rates for individual policyholders based on risk. These excessive price controls contribute to the growth of the state’s two residual markets, which would grow even more were a BAT system applied to international reinsurance.
Imposing a border-adjustment tax or any other tax on international reinsurance would make it harder and costlier for North Carolina property owners to buy home insurance, for employers to buy workers’ compensation, for factories and industrial plants to insure machinery and for contractors to get terrorism insurance they need to erect new buildings. It’s a bad deal for policyholders and for the state.
Image by Dmitrijs Kaminskis