Although just about any analyst of the Obama administration’s $3.6 trillion 2011 spending plan can find plenty of flaws, a tax provision with a wonky name — deduction disallowance for excess non-taxed reinsurance premiums paid to affiliates — may be the new budget’s single worst idea. (see page 161)
The facts: The tax would produce about $50 million in yearly revenue, stick consumers with higher insurance costs that actuarial firm the Brattle Group estimated at around $10 billion, and potentially start a trade war.
Explaining the tax proposal and how it impacts consumers requires background in how insurance and reinsurance work. To begin with, “primary” insurers like Allstate and CNA buy insurance of their own — reinsurance — to diversify risks and protect against massive disasters like hurricanes. All sizeable insurers buy reinsurance both from entirely separate corporations and “affiliated” coverage from parent or sister companies that they know won’t abandon them after a disaster.
Most U.S. reinsurance comes from offshore companies. Because these companies often insure against events (like Tokyo earthquakes and U.K. floods) that probably won’t happen simultaneously with disasters in the United States, the process reduces prices by letting companies profit off of one type of coverage when they lose it on another. Right now, these offshore companies pay federal excise taxes roughly equivalent to U.S. corporate income taxes. The administration’s budget would give U.S.-based companies an advantage by imposing a burdensome tax on many offshore companies’ affiliated reinsurance transactions while allowing deductions for the same sort of transactions by U.S.-based companies. This has trading partners worried: When the Senate considered a similar proposal last year, the European commission strongly hinted that a trade war could result.
While offshore companies would suffer under this regime, there’s no evidence that U.S.-companies would fill in the gaps for consumers or provide more coverage for U.S. consumers. Connecticut’s W. R. Berkley, the new tax’s main proponent, recently told that the Wall Street Journal that its practice of not writing the type of volatile natural-disaster coverage that offshore companies specialize in was a major source of its record fourth quarter 2009 earnings.
The new insurance tax hike in administration’s budget represents an attack on American consumers. It’s a terrible idea.
— Eli Lehrer is a senior fellow at the Heartland Institute.