Policy Studies Catastrophe Insurance

Impact of a border-adjustment tax on the North Carolina insurance market

As a state on the Southeast Atlantic Coast, North Carolina is vulnerable to the punishing impact of hurricanes and other natural catastrophes and relies heavily on insurance to manage its significant risk. But as Congress prepares to consider structural changes to the U.S. tax code, proposals that target international reinsurance would have adverse consequences on the ability of North Carolinians to affordably obtain coverage.

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 North Carolina consumers an additional $800 million 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 North Carolina—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 North Carolina and their ability to secure insurance coverage for their homes, cars and businesses.

This is of particular concern in North Carolina where, thanks to an outdated and inflexible “rate bureau” system, many residents already have great difficulty finding property insurance coverage. While most states that employ residual property insurance markets to cover hard-to-place risks have seen the size of those markets decline over the past decade, North Carolina’s two state-backed entities have grown rapidly.

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.

Image by Stephen Finn

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