US insurance costs would soar if border adjustment tax is passed

Californians alone would face $1.9 billion in higher insurance costs if Congress passes a border adjustment tax as part of federal tax reform, according to a new study released today by the R Street Institute and the Pacific Research Institute (PRI).

This tax would make it virtually impossible for US insurers to buy global reinsurance, which they commonly use to spread risk and keep insurance rates affordable.

The PRI study concluded that despite the constant risk of natural disasters in the state, Californians have affordable property insurance rates because insurers can spread the risk by buying international reinsurance.

It also noted that under current tax law, US insurers can write off the costs of international reinsurance just like any other cost of doing business, helping them to keep policies affordable. They cede about 20 percent of direct written premiums to reinsurers annually.

The report noted that if insurers are not able to buy reinsurance to spread their risk, all the risk would be concentrated in the US rather than spread globally. This would make California's insurance market less competitive, and result in Californians paying higher premiums.

A border-adjustment tax is one of the ideas that has been floated in Washington as part of a major tax reform effort expected later this year. To date, specific legislative proposals have not yet been put forward by Congress or the White House.

"As Congress prepares to consider structural changes to the US tax code, proposals that target international reinsurance would have adverse consequences on the ability of Californians to obtain affordable coverage," said Lars Powell, Ian Adams, and RJ Lehmann, authors of the report.

Dr. Wayne Winegarden, PRI senior fellow in business and economics, added: "Whatever road Washington takes on tax reform, it must act carefully and avoid the unintended consequences of a proposal like a border-adjustment tax.

"Adopting tax reform that has the effect of increasing the insurance rates of all Californians, or worse, devastating our state's insurance market, is the wrong approach."

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