The more insurers, the cheaper the rates
BY SCOTT B. CLARK
The 21st century is scarcely 10 years old. But Americans are constantly reminded that natural and man-made disasters are as prevalent as ever.
The oil rig explosion off the coast of Louisiana and the coal mine catastrophe in West Virginia remind Americans of the terrible costs of industrial disasters. In 2005, Hurricanes Rita, Katrina and Wilma taught us that Mother Nature can menace us. In 2001, the terrorist attack on the World Trade Center demonstrated that our fellow human beings can commit unimaginably evil acts.
The global insurance market insures Americans against the economic costs of these disasters. With a national economic recession and an international financial crisis, we don’t need to raise taxes on international insurers, as U.S. Rep. Richard Neal, D-Mass., has proposed.
Here’s how this global insurance market works: Total insured losses from the explosion of the Transocean Deepwater Horizon rig may exceed $1.5 billion. According to published reports, about 51 percent of the Transocean property coverage is held by eight insurance companies, only one of which is headquartered in the United States.
As of May 13, among all 21 insurers that reportedly are covering a share of the multi-party loss, only two are based in the United States.
Especially for risky projects or those in disaster-prone regions, Americans rely on a global network of insurers and reinsurers for the same reasons that we need insurance in the first place.
Insurance allows consumers to pool and diversify their risks. With reinsurance, insurance companies do the same thing for each other. In order to obtain backup coverage, especially for risky sites such hurricane-prone Miami, insurance companies purchase additional insurance on properties that they themselves have insured.
The United States accounted for 87 percent of worldwide insured catastrophic losses in 2005 and 61 percent in 2006. In order to spread all this risk around the widest possible area, U.S.-based companies purchase about two-thirds of their property catastrophe reinsurance — and approximately half of all their $100 billion in reinsurance — from foreign reinsurers.
Hurricanes Katrina, Rita and Wilma required $59 billion in insurance payments. More than 60 percent of these payments came from foreign insurers and reinsurers.
As long ago as 1992, foreign reinsurers helped Florida property-owners to recover their losses from Hurricane Andrew. After the hurricane, seven catastrophe reinsures were founded in Bermuda to meet the sudden demand for coverage.
The only winners from Rep. Neal’s tax increase would be a handful of domestic insurance companies that don’t provide much reinsurance but desperately want to protect themselves from international competition. The losers would be everyone else.
When you tax something punitively, you get less of it. As the Boston-based economics consulting firm, the Brattle Group, concluded in a recent study for the Coalition for Competitive Interest Rates, the total supply of reinsurance for U.S. companies and consumers would decline by about 20 percent.
When there’s less of something, it costs more. According to the same study, Americans would pay an extra $10 billion to $12 billion just to continue their current insurance coverage. That is why state insurance commissioners, consumer advocates, business people and state legislators oppose this tax increase.
Americans deserve to be insured against natural disasters, accidents and acts of terror. But U.S. insurers don’t deserve to be protected against competition that strengthens the industry and benefits all Americans.
Scott B. Clark is secretary and director of the Risk and Insurance Management Society and risk and benefits officer for the Miami-Dade County School Board.