Raise Taxes on Reinsurance Companies
As Louisiana Continues to Recover from Katrina/Rita/Gustav
By James J. Donelon
September 2, 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 1500 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.
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
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