News & Updates


Tax would hit insured hard

By Bill Newton, Special to the Times
In Print: Tuesday, September 8, 2009

Florida and the Gulf Coast were hit hard by Hurricanes Katrina, Rita and Wilma in 2005. Together, this terrible trio caused $59 billion in insured losses. No one who survived this natural disaster will forget the staggering human and financial costs.

Here’s what many Floridians may not know: More than 60 percent of the $59 billion in payments for hurricane damage came from insurers headquartered outside the United States, especially those who provide backup coverage referred to as reinsurance.

And here’s what Floridians can’t afford to ignore: Congress is considering a punitive tax on the same overseas insurance companies that provide the backup coverage for Florida homeowners and business people. Coming in the midst of a worldwide economic and financial crisis — and with the threat of tropical storms always looming over our state — this federal legislation would make it more difficult and much costlier for Floridians to get the catastrophic coverage that we need.

What is reinsurance? Why is it so important for states such as Florida that are especially vulnerable to natural disasters? Why is much of our reinsurance provided by international insurers? And why can’t Floridians afford the proposed 25 percent tax on premiums passed along to overseas insurance companies that Rep. Richard Neal, D-Mass., is reintroducing in Congress?

Just as insurance makes it possible for consumers to pool and diversify their risks, reinsurance allows insurance companies to do the same thing for each other. By purchasing insurance on properties that they have insured, companies can obtain backup coverage, particularly in places with the greatest likelihoods of large, infrequent and unanticipated claims from disasters — such as hurricanes in Florida or earthquakes in California. By sharing the risk, insurance companies can afford to provide services that might otherwise be unaffordable, such as insuring large numbers of Florida homeowners.

Because the United States has many high-risk but highly inhabited regions — for instance, the Florida Keys and San Francisco — this country relies on a global network of foreign and domestic reinsurers that spread the risk across the widest possible area. Of the $100 billion in reinsurance premiums paid by U.S. insurers, about half goes to purchase reinsurance from overseas insurers. With property catastrophe re- insurance, about two-thirds of the premium secures coverage from foreign-based companies.

That’s why Neal’s proposed tax on foreign-based companies would be so disastrous for consumers across this country and especially in Florida. As the respected economics consulting firm, the Brattle Group, concluded in a recent study conducted for the Coalition for Competitive Insurance Rates, this tax would make insurance less available and affordable.

Overall, the supply of reinsurance in the United States would fall between $19 billion and $22 billion, wiping out about 20 percent of the total available supply and 40 percent of the supply from outside the country. As we learned in Economics 101, when supplies sink, prices soar. Throughout the nation, consumers would pay $10 billion to $12 billion more just to continue their current insurance coverage.

In Florida, with the constant danger of storms and floods, increasing taxes on international insurers could produce an additional $300 million a year in higher property insurance costs and a total annual increase of more than $565 million in all Florida insurance costs, as well as a drastic reduction in the number of companies providing reinsurance in our state. At a time when the unemployment rate in Florida is over 10 percent, home values are dwindling and business activity is declining, this is certainly not the time to make access to insurance more costly.

Whatever the reasons — climate change, increased development, or poor preparation by private builders and every level of government — the risks from natural catastrophes have increased dramatically since the days when Hurricane Andrew made history by costing $22 billion in insured losses in Florida and Louisiana in 1992.

The last thing Florida needs is a perfect storm of shrinking supplies and skyrocketing costs for insurance for homeowners and business people resulting from tax protectionism favoring some insurance companies over others. Let’s make sure Congress doesn’t do the wrong thing at the worst possible time.

Bill Newton is executive director of the Florida Consumer Action Network, a grass roots organization advocating on environmental protection, energy efficiency, health care, utilities and insurance.


[Last modified: Sep 08, 2009 05:47 PM]