Proposed legislation targeting offshore reinsurers would harm US consumers

Proposed tax legislation designed to defer the recognition of affiliated offshore reinsurance for US tax purposes will negatively impact businesses and consumers in the US, a new report sponsored by the Association of Bermuda Insurers and Reinsurers (ABIR) and written by economists at global consulting firm The Brattle Group has found.

The report, "The Impact of Offshore Affiliate Reinsurance Tax Proposals on the US Insurance Market," shows that reinsurance is critical to risk management in the US property and casualty (P&C) insurance industry, particularly for natural catastrophes and other infrequent but high-loss events.

Affiliate reinsurance is central for the insurance groups because it addresses the problems of adverse selection and moral hazard, and also allows for efficient intragroup capital management.

The new anti-affiliate-reinsurance tax proposal will adversely affect US homeowners and businesses who will likely encounter reduced availability and higher prices for property and casualty insurance for infrequent but high-loss events. The report also predicts a higher negative impact of the border adjustment tax, a component of House Republican's Blueprint tax reform proposal.

"Our analyses show that the new proposals would lead to a degradation of the ability of firms to manage risk, both inside and outside the P&C industry," noted Michael Cragg, principal and chairman of The Brattle Group, and one of the co-authors of the report.

"It would widen the protection gap between insured and uninsured losses, which would result in the excess risk falling on the government, particularly for natural catastrophes and other high-loss events."

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