After years of devastating wildfire seasons, California is facing a full-on insurance crisis that you can add to the list of its other crises. In this case, homeowners who live in wooded areas — the wildland-urban interface, as actuaries and policy wonks insist on calling it — are increasingly unable to find home insurance  and are stuck paying prime rates for barebones policies in the state-created insurer of last resort known as the FAIR Plan.
The problem stems in part from our cockamamie insurance system, born out of 1988’s Proposition 103  — a consumer-activist/trial-lawyer-concocted initiative that limits the ability of insurers to adjust their rates to account for risk. Lawmakers might ignite an even bigger crisis as they consider a bill that would forbid insurers from canceling policies in high-risk wildfire areas. That could lead to a property insurance exodus from the state, as I detailed  last month for The American Spectator.
Now the Biden administration is likely to exacerbate this already tenuous situation with a tax plan that has nothing to do with insurance, but will make it harder for insurance companies to offer policies in risky areas. The president’s “Made in America Tax Plan ” would not only raise income taxes for families earning $400,000 a year but would also slap new costs and regulations on companies that engage in routine international financial transactions.
American insurance companies rely heavily on something called reinsurance, which is the insurance that insurance companies purchase to withstand severe losses from tropical storms, earthquakes, and raging wildfires. Most reinsurance companies have their headquarters overseas, especially in Bermuda . The Atlantic Ocean paradise is close to the United States, has low taxes, a British-based legal code, and a sophisticated insurance-regulation system.
The bottom line is that major U.S. insurance companies must use reinsurance  if they want to expand the number of homeowner policies that they offer — or else their underwriting is limited to the amount of their own capital reserves. Without reinsurance, insurance companies would have to pull back from overly risky markets or else they could face insolvency in the face of a widespread catastrophic event, such as a particularly bad wildfire season.
The Biden tax plan actually expands on the Trump administration’s efforts to promote more investment in the United States. President Trump signed into law the Tax Cuts and Job Act, which included the Base Erosion Anti-Abuse Tax , or BEAT. That measure slapped a 10-percent tax on U.S. insurance companies that sent their reinsurance (and other) business to affiliated offshore entities.
That tax hike didn’t generate much revenue, raised the costs of reinsurance, and encouraged companies to concentrate their risk in the United States rather than spreading it around. Biden recognizes BEAT’s failure. Instead of pulling back, however, he wants to double down on this bad policy by trying to raise corporate taxes  across the globe.
He has introduced a measure with an even more long-winded and convoluted name than BEAT — Stopping Harmful Inversions and Ending Low-tax Developments, or SHIELD . The president is going after all low-tax jurisdictions, with Apple’s overseas operation in Ireland in the crosshairs. Again, insurance isn’t the target, but the industry will take a hit.
SHIELD pushes all reinsurers to adopt a global-minimum tax, which almost certainly will be above 10 percent. There are two likely scenarios if SHIELD becomes law. First, American insurance companies will continue to use overseas reinsurance companies, which means that they’ll pay higher taxes on their “cessions” — the portion transferred to a reinsurer. In the current market, especially in troubled wildfire areas in California , that will mean higher prices for homeowners.
- “unable to find home insurance”: https://www.insurancejournal.com/news/west/2019/08/21/537675.htm
- “Proposition 103”: https://www.rstreet.org/wp-content/uploads/2015/10/RSTREET43.pdf
- “detailed”: https://spectator.org/california-insurance-wildfires-ab-1522/
- “Made in America Tax Plan”: https://home.treasury.gov/system/files/136/MadeInAmericaTaxPlan_Report.pdf
- “Bermuda”: https://www.ft.com/content/2f7efed0-15db-11ea-9ee4-11f260415385
- “reinsurance”: https://www.investopedia.com/ask/answers/08/reinsurance.asp
- “Base Erosion Anti-Abuse Tax”: https://taxfoundation.org/tax-basics/base-erosion-anti-abuse-tax-beat/
- “corporate taxes”: https://taxfoundation.org/biden-corporate-income/#:~:text=Under%20President%20Biden
- “SHIELD”: https://news.bloombergtax.com/daily-tax-report-international/biden-tax-plan-targets-inversions-to-keep-them-from-coming-back
- “California”: https://www.insurancejournal.com/news/west/2019/08/21/537675.htm