Obama Tax Could Make Terrorism Insurance Scarce

Erasing the deductibility of reinsurance would make insurers charge more and cut the availability of property-casualty coverage for corporations, a...
David KatzApril 16, 2013

An Obama administration proposal to eliminate the tax deduction for reinsurance premiums paid by U.S.-based insurance companies to their foreign affiliates would boost prices for terrorism coverage and property-casualty insurance overall, corporate risk managers say.

As a result of the provision, which is part of the administration’s 2014 budget, “the availability of coverage would be reduced and costs for [corporate] consumers would increase significantly, particularly in urban areas subject to terrorism risk and areas prone to natural disasters,” John Phelps, president of the Risk and Insurance Management Society, wrote in a letter delivered to the U.S. House Ways and Means Committee’s International Tax Reform Working Group.

The letter was unfortunately delivered yesterday, on a day when two explosions killed three people and critically injured at least three more at the Boston Marathon. President Obama today called the bombings an “act of terror,” according to the Chicago Tribune. (The RIMS letter was e-mailed to the House working group between noon and 12:30 p.m. Monday, according to the Society. The bombings occurred at about 2:50 p.m.) 

Citing a 2010 study backed by insurers and reinsurers in the United States, Bermuda, and Europe, Phelps wrote that removing the tax deduction for reinsurance premiums ceded by domestic insurers to foreign affiliates “would lead to a 20% reduction in the overall supply of reinsurance…available to the U.S. market, which would in turn lead to [corporate] consumer price increases of between $11 and $13 billion annually for the same coverage currently being purchased.”

Besides the toll on corporate and individual insurance buyers in urban areas with particular exposure to terrorism risks, “the bulk of the increased cost will be imposed on the coastal states that are stripped of the benefits from foreign reinsurance’s impact on the availability of affordable coverage,” he wrote. RIMS, which mostly consists of corporate risk management and insurance professionals, has 10,000 members worldwide, including 80 percent of Fortune 500 companies. Most Fortune 500 companies own captive insurance companies – offshore and onshore entities that enable corporations to lower their risk-funding costs by buying reinsurance, which is typically cheaper than insurance. 

Currently, the U.S. tax code enables U.S. based insurance carriers to take deductions for “ceding” reinsurance to foreign affiliates. In reinsurance arrangements, the insurance company cedes parts of a larger potential risk to the reinsurance company. In exchange, the reinsurer gets part of the premium dollars the insurer was paid to take on the risk.

Widely used by the property and casualty industry, the use of foreign reinsurance by domestic carriers is an “efficient mechanism to pool risks, diversify exposures, reduce the volatility of losses, and as a result, enhance availability of coverage and reduce prices for consumers,” the RIMS president wrote.

“Throughout the recent series of natural catastrophic events, and the terrorist attack on 9/11, foreign reinsurers have filled gaps in coverage where domestic insurers either discontinued or severely curtailed coverage or significantly increased rates,” Phelps added.