Arguments For and Against Reinsurance Tax Bill Continue

July 16, 2010

Yesterday’s hearing before the House Ways and Means Committee has inspired both sides in the debate over Rep. Richard Neal’s (D-MA) plan, HR3424, to tax foreign-based insurers and reinsurers. [See IJ web site – https://www.insurancejournal.com/news/national/2010/07/15/111603.htm ].

The immediate focus is on remarks made by Sean Shaw at the Committee hearing, and the subsequent rebuttle published by the LECG Consulting Group.

The Opposition’s Position
The Coalition for Competitive Insurance Rates (CCIR), which speaks for those opposed to the Bill, strongly approved of the testimony given by Florida Insurance Consumer Advocate Shaw.

He expressed concerns that Neal’s proposal would have “damaging effects on consumers in Florida and other disaster-prone areas and echoed opposition from consumer advocates, trade experts, economists, business leaders and others,” said a CCIR bulletin. Among other things, Shaw predicted that Neal’s plan could increase insurance costs nationwide by $11 to 13 billion.

“Especially in hard times, international insurers and reinsurers are indispensable for high-risk states such as Florida and for a heavily populated, highly industrialized, and increasingly vulnerable nation, such as the United States,” Shaw stated.

The CCIR pointed out that the tax on foreign-based reinsurers would mainly affect those who “provide a significant percentage of reinsurance coverage in the United States, and who have a strong presence in the nation’s most vulnerable, disaster-prone areas like Florida, the Gulf Coast, and California.”

It also cited a study by the Brattle Group that “consumers living in Florida would be especially hard hit by cost increases from the Neal bill, paying an additional $266 million to insure their homes and $264 million to insure their commercial properties.”

Shaw stated that as far as Florida is concerned, “more business would flow into our already-troubled Citizens Property Insurance Corporation. More demands would be placed on the taxpayer-subsidized Florida Hurricane Catastrophe Fund. Other states would suffer similar challenges.”

His testimony reiterated the concerns voiced by CCIR and the many individuals who have made their opposition to the Neal bill clear. The organization said that, “despite widespread concerns surrounding raising taxes on the invaluable global network of companies who help to protect our properties and livelihoods, the Neal bill continues to be advocated for by a small group of powerful, profitable companies who stand to benefit from a less competitive insurance marketplace.”

The Proponents’ Position
However, the other side, which supports the Bill’s passage, received support from the consulting firm LECG, which challenged some of the assertions made by Shaw and the CCIR. They examined the situation in Florida, and came up with conclusions that could weaken the the findings of the Brattle Group. The full report, which includes a number of charts and exhibits, is available at – http://www.coalitionfordomesticinsurance.com/commentary/CDI-Neal-Bill-Florida-HomeownersMarketReport.pdf .

LECG said that an examination of the “effect of the Neal Bill on Homeowners Multiple Peril insurance, the line of business most relevant to consumers, shows no potential impact of the proposed legislation on reinsurance capacity or insurance rates.

“Direct premium for Homeowners Multiple Peril insurance was a $6.9 billion market in Florida in 2009. The leading writer was State Farm Mutual Automobile Insurance Company followed by Citizens Property Insurance Corporation.”

The report stressed the differences between “affiliated” and “unaffiliated” reinsurers. It explained than when reinsurance coverage is obtained, or ceded, to a reinsurer, it can be to the former, which is “owned by the parent company, while an ‘unaffiliated’ reinsurer has no significant ownership relationship between the reinsurer and the ceding company.”

LECG Said the “approach outlined in the Brattle Report develops an analysis of nationwide premiums and reinsurance for a given line of business, and then applies that percentage to individual states, using the premium written in a particular state.

“By analyzing the principal writers of Homeowners Multiple Peril insurance in Florida in 2009, we can conclude that there would be no financial effect of the Neal Bill on Florida Homeowners Multiple Peril, taking into account the use of offshore affiliate reinsurance by those companies. An analysis of the aggregate (nationwide) reinsurance utilized by those carriers shows that there is virtually no affiliate offshore reinsurance in the Florida Homeowners Multiple Peril market.”

It also stressed that “none of the top 20 writers [in Florida] have affiliate offshore reinsurance that is in excess of the 12.8 percent industry fraction for Homeowners Multiple Peril computed by Brattle for 2009. Thus, while it is true that unaffiliated reinsurance is a significant element in the Homeowners Multiple Peril Market, offshore affiliate reinsurance appears to have no impact on the Florida market.”

LECG’s report was mainly concentrated on the situation in Florida, which, due to the presence of Citizens and the withdrawal from the state of many primary insurers as well as a number of reinsurers, is a special case. It remains for future studies to forecast the effect of Rep. Neal’s Bill might have on markets in other states.

Sources: CCIR and LECG

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