WASHINGTON (July 13, 2017) – As the nation’s most populous state, among the wealthiest states and a state that is vulnerable to the catastrophic effect of earthquakes, floods, wildfires and other natural catastrophes, California relies heavily on insurance to manage its significant risk. As Congress prepares to consider structural changes to the U.S. tax code, a new R Street Institute policy study warns that making it more difficult for insurers to buy international reinsurance will have adverse consequences on Californians’ ability to obtain coverage affordably.
Applying a destination-based cash flow tax—better known as a “border-adjustment tax,” or BAT—to the import of reinsurance will, authors Lars Powell, Ian Adams and R.J. Lehmann note, cost California consumers an additional $1.91 billion in higher property-casualty insurance premiums over the next decade.
“While the precise contours of congressional tax-reform efforts are yet to be determined, proposals such as a BAT or a partial BAT, a reciprocal tax, territorial tax, a discriminatory tax on insurance affiliates or a minimum tax all would affect insurers’ ability to use reinsurance to spread risk globally, and hence disproportionately harm consumers in states like California and their ability to secure insurance coverage for their homes, cars and businesses,” write the authors.
As the study demonstrates, this is of particular concern in California, where residents are overexposed and underinsured with regard to earthquake risk. To date, the California Earthquake Authority has expended great effort to boost the takeup rate of earthquake insurance within the state in an actuarially sound manner. Its ability to continue to do so would be hampered seriously should the cost of reinsurance be driven up. The less that private property owners insure their earthquake risk, the more it will be shunted onto the backs of taxpayers via unprotected mortgage loans held by Fannie Mae and Freddie Mac.
“It’s important to bear in mind that, under the current system, insurance companies don’t just import reinsurance – they also export risk,” write the authors. “Denying insurers the ability to engage in responsible risk transfer would mean concentrating those risks here on our shores.”
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.