As originally published in Morning Consult.
“A win-win for American taxpayers and American-based businesses.” That’s the claim that was recently made by an insurance executive who was advocating a punitive new tax targeting global affiliate reinsurance. This new tax targets global insurers like Zurich Insurance Group and will add billions in costs for American businesses and families who are navigating an increasingly risky world.
Importantly, studies show that this proposal will shrink the U.S. economy by $1.4 billion and create an uneven playing field in the U.S. insurance market. Congress should reject this call for protectionism that is at the expense of American businesses and homeowners.
Zurich Insurance began operating in the United States over 100 years ago. In our early years, we supported the construction of the Hoover Dam and insured the Chicago World Fair. More recently, we supported the recovery efforts after Hurricane Katrina and Superstorm Sandy.
In fact, global insurers and reinsurers paid more than 60 percent and 48 percent, respectively, of the claims associated with these devastating storms. Indeed, much like other globally based companies operating in the United States, we’re part of the fabric of the American economy.
Our global capacity is essential to the success of our American business customers. Natural catastrophe, terrorism and cyber risks are all rising. And in our increasingly global economy, a disruption in Europe, or Mexico, is far more likely to impact American businesses today than ever before. Reinsurance enables us – and our domestic and global competitors – to diversify these risks, lowering costs for policyholders. Ironically, several U.S.-based insurers who currently support this punitive proposal actually opposed similar legislation in Brazil in 2011.
Affiliate reinsurance allows insurance groups to better manage capital and risk over the long term. As such, insurers that use affiliate reinsurance transactions can more quickly deliver support after a major catastrophe, whereas an unaffiliated reinsurer may raise prices after a major catastrophe, ultimately hurting consumers who may rely upon that global capacity.
Additionally, reinsurance transactions may be less efficient when reinsurers and insurers don’t have access to the same information about the underlying risk. These adverse selection problems plague the unaffiliated reinsurance market, thereby reducing insurance capacity. That problem doesn’t exist when you’re diversifying risk among your own network.
For these reasons, both global and domestic groups use affiliate reinsurance. Combined with much-needed global capacity, these transactions enable global insurers to better serve high-risk geographies and business lines. The result is more effectively priced and robust insurance coverage for American businesses and families.
Unfortunately, in advancing this new tax rule targeting risk-diversifying transactions, proponents continue to ignore four realities.
First, research shows this new tax will increase costs and risks for American businesses and families, especially in high-risk geographies. A recent study by the Brattle Group and the University of Alabama professor Lawrence Powell found that consumers would have to pay $5 billion more to obtain the same level of coverage they currently enjoy.
And states facing more catastrophic risks will bear most of the burden. For example, Californians would face nearly $500 million in higher costs, while New Yorkers, Texans, Floridians and Louisianans would face $335 million, $271 million, $259 million and $62 million in costs, respectively. No wonder many state insurance commissioners – charged with overseeing the private sector’s capacity to support their communities after crises – and agriculture commissioners have joined insurers and federal government officials in opposing these proposals in the past.
Second, this proposed change is not used in any other country, making the United States an outlier on both tax policy and risk diversification, while the rest of the world is working to diversify risk globally to best protect their businesses and families. Tax reform aims to put the United States on a level playing field, yet this proposed change amounts to nothing more than trade protectionism that is counter to the reform’s goals.
Third, higher costs and more risk is not a recipe for economic growth. The Tax Foundation explains that this punitive proposal would decrease U.S. gross domestic product by $1.4 billion and would raise only $440 million annually. Moreover, for every dollar raised, the private sector would lose $4.07. The meager revenue benefits simply don’t outweigh the costs.
Finally, globally based insurance groups operating in the United States face the exact same rules as domestic insurers. These reinsurance transactions are regulated at the state level by insurance commissioners and by the Internal Revenue Service to guard against gaming. In fact, several global insurers pay an effective tax rate that is actually higher than the U.S. domestic insurer average, demonstrating that this punitive tax is merely a solution in search of a problem.
Higher costs, more risk and less growth. That’s the result of this proposal. Given the evidence, Congress should reject this call for protectionism that benefits a subset of one industry at the expense of U.S. businesses more broadly and puts the U.S. tax system further out of sync with global tax norms.
Dennis Kerrigan is the chief legal officer for Zurich North America and the chairman of the Organization for International Investment.