Louisiana Commissioner: Don’t Raise Taxes on Reinsurers

By James J. Donelon | September 3, 2009

Now that the hurricane season is well underway, Louisianans remember when Katrina came ashore, late in August 2005, with a storm surge that eventually flooded New Orleans and leveled many Gulf Coast towns, costing more than 1,500 lives and causing more than $25 billion in damage in our state alone.

In the years ahead, Louisiana and our entire region may be hit by a perfect storm of meteorological and man-made crises. With higher temperatures and volatile weather, there is a devastating and often deadly combination of rising seas and more powerful storms.

Together with other coastal states, Louisiana is confronting a serious insurance availability problem, as demonstrated by several national companies reducing their coastal exposure. The worldwide financial and economic crisis also isn’t making life any easier for homeowners, business people, and insurance companies in this area and all across this country.

Meanwhile, we’re facing an unnecessary threat: Massachusetts Congressman Richard Neal is reintroducing legislation to raise taxes on the foreign reinsurance companies that helped Louisiana recover from the destruction caused by Katrina and that will be indispensable to insuring residential, commercial and industrial properties in the years ahead.

What is reinsurance? Why is it so essential for Louisiana, for the Gulf Coast region, and for the entire nation? And why are foreign reinsurance companies indispensable?

Consumers pooling and diversifying their risks is what insurance is all about. Insurance companies do the same thing for each other by buying backup coverage on properties that they themselves have insured. This “reinsurance” is especially essential in areas with the greatest risks of huge, unexpected, and infrequent claims, such as coastal areas here in Louisiana. By sharing these risks, insurance companies have been able to cover properties that might otherwise be unaffordable, such as stores in New Orleans or homes near the Gulf Coast.

In fact, the United States has many areas that are densely settled, highly developed, and very high risk – from the San Francisco Bay area, with its history of earthquakes, to the Florida Keys, with its frequent flooding, and Lower Manhattan, with the fear of terrorist attacks and hurricanes. In order to cover these communities and the whole country, the U.S. depends on a global network of foreign and domestic reinsurers to spread those risks.

Of the $100 billion in reinsurance purchased by U.S. insurers, about half comes from foreign companies. With property casualty insurance, that figure is two-thirds. Following Hurricanes Katrina, Rita, and Wilma insurance companies based in Bermuda contributed $17 billion in claims payments to U.S. consumers. Here in Louisiana, these companies paid an estimated $9 billion for residential and commercial property claims from Hurricanes Rita and Katrina.

The Internal Revenue Service has the tools to correct tax avoidance or evasion by insurance and reinsurance companies, domestic and foreign. If we arbitrarily raise taxes on foreign reinsurance companies, especially in the midst of a slump in the industry and a financial crisis throughout the world, we will simply increase the cost and decrease the availability of the insurance that we need.

In fact, as the respected economics consulting firm, the Brattle Group, recently concluded in a study conducted for the Coalition for Affordable Insurance Rates, the supply of reinsurance within the U.S. would decline by between $19 billion and $22 billion.

As usually happens when supplies fall, prices would rise: Consumers would pay between $10 billion and $12 billion more, just to maintain their existing levels of coverage. With our constant risk of tropical storms and growing insurance problems, Louisiana would be one of the seven states hardest hit by slumping supplies and skyrocketing costs.

As state Insurance Commissioner, I have written to Sen. Max Baucus (D-MT), chairman of the Senate Finance Committee, to urge him to oppose this ill-considered and poorly timed tax increase on an essential industry and its hard-pressed customers.

All Louisianans should write to their U.S. Senators and Representatives asking them to vote down Congressman Neal’s bill before it creates a perfect storm that devastates our insurance market, our communities, and our economy.

James J. Donelon is Commissioner of the Louisiana Department of Insurance.

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