Walter Bell: Proposed legislation would seriously curb reinsurance capacity, hurt economy

It's been well documented that reinsurance is a critical element of a well-functioning economy. This point has been driven home in the state of Florida, where the state-run insurer has charged artificially low premiums (not actuarially based) and lacks the necessary reserves to pay claims in the event of a major hurricane. Without the adequate backing of the private reinsurance market, the state is ill-prepared to face the next big disaster.

Now comes the US Congress, which is considering legislation that would unfairly tax foreign reinsurers, such as Swiss Re. A study has shown that passage of this law would result in a 20 percent decrease in reinsurance capacity and a $10 - 12 billion increase in insurance prices per year to US consumers.

In a recent edition of the South Florida Sun-Sentinel, Swiss Re America Holding Corporation Chairman Walter Bell writes about this little-known bill that would have widespread effects.

2 January 2010
The Palm Beach Post
Copyright 2010. The Palm Beach Post, All Rights Reserved.

While Floridians weathered the hurricane season relatively unscathed, they should be aware of a storm, though this one isn't brewing offshore. Language recently reintroduced in Washington could jeopardize access to, and increase the cost of, insurance for Floridians by imposing a discriminatory tax on reinsurers -- the companies that protect insurers. This has the potential to make recovery from disasters such as major hurricanes more expensive and time-consuming.

Reinsurers play a vital role in American commerce by offsetting risk around the world and enabling primary insurers to provide affordable coverage to customers. HR 3424 proposes a punitive tax on internationally based reinsurers as a supposed "tax haven" crackdown. The proposal, however, would have a negative impact on all international reinsurers, even those in jurisdictions with equal or higher taxes than in the United States. These companies receive no tax benefit when they incur U.S. losses, and rather than closing a "tax loophole," this bill creates an uneven playing field by taxing international reinsurers twice on the same income, once in the U.S. and once in their home countries.

To compound the problem, more consumers will be forced to use Florida's Hurricane Catastrophe Fund as an insurer of last resort. At the moment, the fund is $7 billion short of what it takes to cover a major storm and would be further strained by the enactment of HR 3424. According to the Brattle Group, U.S. consumers would potentially have to pay $10 billion to $12billion more per year to obtain the same coverage they had before the tax.

The study also says Florida will be one of the states hardest hit because of its exposure to huge property and liability losses. According to AIR Worldwide, Florida's total value of insured coastal exposure is $2.5 trillion. The Brattle study predicted a 20 percent reduction in reinsurance capacity, again limiting availability of insurance coverage in the state.

HR 3424 would put additional strain on the state's budget and, thankfully, Florida's Office of the Insurance Consumer Advocate -- which reports to the elected Florida chief financial officer, Alex Sink -- already has expressed opposition to the bill. The Florida Consumer Action Network also has spoken out against it.

Floridians should urge their members of Congress to oppose HR 3424. With Florida's history of hurricanes the past 20 years, the state does not need to add a man-made disaster to that list.


New York

Editor's note: Walter A. Bell is chairman of Swiss Re American Holding Corp. He is also the former commissioner of the Alabama Department of Insurance.

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