Impact of a border-adjustment tax on the Louisiana insurance market
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. 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.
Specifically, this report finds that applying a destination-based cash flow tax—better known as a “border-adjustment tax,” or BAT—to the import of reinsurance would cost Louisiana consumers an additional $1.11 billion in higher property-casualty insurance premiums over the next decade.
This 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. Because property and casualty insurers that do business in Louisiana—as in other states exposed to major natural disasters—cede a large volume of risks to foreign reinsurers, the state would experience dramatically higher insurance premiums under a BAT system.
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 Louisiana and their ability to secure insurance coverage for their homes, cars and businesses. 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.
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