Study: Border adjustment tax would hike state’s insurance premiums

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As Congress contemplates structural changes to the U.S. tax code, proposals that focus on international reinsurance would have unfavorable consequences that could undo progress, according to a new study.

The report, jointly released by Washington think tank R Street Institute and New Orleans-based Pelican Institute for Public Policy, states that a border adjustment tax, or BAT, would cost Louisiana consumers an additional $1.11 billion in higher property-casualty insurance premiums over the next 10 years.

The authors say the progress is evident since 2005, when Hurricane Katrina created the costliest insurance event in the nation’s history.

Dr. Lars Powell, executive director of the Alabama Center for Insurance Information and Research at the University of Alabama and a senior fellow of the R Street Institute, said passing such legislation would have severe consequences for insurance companies that originate outside the U.S.

The forecast stems from eyeing the impact that a border adjustment tax would have on the supply of international reinsurance and estimating 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 and other states privy to natural disasters yield a larger volume of risks to foreign reinsurers, Louisiana would experience noticeably higher insurance premiums under a border adjustment tax system, the report notes.

Locally, the Port of New Orleans uses companies like the Lloyd’s of London to insure its multimillion-dollar property assets in the event of a hurricane.

Powell said diversification in the insurance industry is crucial.

“If you can mix the U.S. hurricane exposure in Louisiana and Florida and the earthquake exposure in California, those are all very large things to insure,” Powell said. “If you want to diversify that, you mix it with flood risk in Europe and earthquake risk in Asia.”

He said these are all large perils that can someway offset the ones in the U.S.

“If you lose the ability to do that, then by definition the price must go up,” he said.

The study uses commercial catastrophe models to determine the diversification effect, comparing global and national diversification numbers. Without global diversification, U.S. insurance companies would have to raise $71 billion in capital and would increase premiums to foot the bill – an amount Powell calls a “conservative estimate.”

While the exact outlines of congressional tax-reform efforts are yet to be decided, 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 disproportionately hurt consumers in states like Louisiana and their ability to secure insurance coverage for their homes, cars and businesses, according to the report.

If Congress decides to enact a BAT as part of an overall tax-reform package, the authors urge that the legislation take into account that developed nations that employ the conceptually similar value-added tax (VAT) system almost universally exempt financial services like reinsurance from the tax.