Policy Studies Governance

Impact on New York State of taxing reinsurance transactions

The attached policy study was co-authored by R Street Senior Fellows Ian Adams and R.J. Lehmann.

The enormous devastation caused by Hurricane Harvey, still being tallied at the time this paper went to press, has prompted renewed public discussion of appropriate policies to prepare for and finance the recovery from major disasters. Such conversations arrive at a fortuitous time, as Congress also is set to consider a major restructuring of the U.S. tax code for the first time in more than 30 years.

While the precise contours of congressional tax-reform efforts are yet to be determined, potential changes to the taxation of cross-border reinsurance transactions—such as through the use of a territorial tax, a discriminatory tax on insurance affiliates or a full or partial border-adjustment tax—would affect insurers’ ability to use reinsurance to spread risk globally. Hurricane Harvey offers evidence of the folly of such an approach, as early estimates suggest as much as half of the insured cost of Harvey’s damages could fall to global reinsurance companies.

This paper, continuing a series of R Street Institute publications that examine the impact of such tax schemes on local U.S. insurance markets, finds the impact to consumers within New York State of taxing cross-border reinsurance transactions would be an additional $1.21 billion in higher property-casualty insurance premiums over the next decade.

This projection is derived by examining the impact that discriminatory tax treatment of cross-border reinsurance transactions would have on the supply of international reinsurance, and calculating the effects that subsequent changes in price and availability would have on insurance markets and policyholders. Because property and casualty insurers that do business in New York State—as in other states and regions exposed to major natural disasters—cede a large volume of risks to foreign reinsurers, these states would experience dramatically higher insurance premiums under tax systems that disallow deductions for cross-border reinsurance transactions. Such changes to the tax could would therefore disproportionately harm consumers’ ability to secure insurance coverage for their homes, cars and businesses.

This is of particular concern in New York, where residents are exposed to hurricane, severe storm and flood risk and have even recently suffered significantly at the hands of Hurricanes Sandy ($9.6 billion in insured losses in New York alone) and Irene. In fact, based on property losses, three of the costliest hurricanes in U.S. history afflicted New York (Ivan, Frances and Sandy). The less that private property owners insure their own risk, the more it will be shunted onto the backs of taxpayers.

As Congress prepares to consider structural changes to the U.S. tax code, proposals that target international reinsurance would have adverse consequences on New York’s ability to obtain coverage affordably.

Image by a katz


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