Reinsurance coverage — tax bill’s wrinkle for Florida, hurricane risk

It took months, but late last Friday night, Senate Republicans were able to find enough votes to move tax reform forward. In light of that development, it is past time for Florida’s congressional delegation to reach a consensus of its own relating to a provision of that tax reform package that could limit the ability of insurers to spread risk internationally and thereby put policyholders in Florida — the state’s economy as a whole —on the path toward disaster.

While this may sound complicated, it’s not. Here’s how it all works. Property insurance companies, the ones with the big names and sometimes amusing ads, purchase reinsurance coverage to protect themselves from events causing a rush of claims — typically, natural disasters. Reinsurance coverage, best thought of as “insurance for insurance companies,” covers primary insurers in such circumstances. The cost of reinsurance is passed along to consumers like you and me as part of our property insurance premium. The cost of reinsurance, and our coverage, is largely dictated by the ability to spread risk internationally.

That’s because reinsurers write uncorrelated risks, like hurricanes in Florida, earthquakes in Japan and blizzards in Europe, which are unlikely to happen at the same time, to allow them to offer competitive rates while limiting their exposure to claims. Current law allows property insurance companies to tax-deduct the premiums they pay for this reinsurance protection, the savings of which are passed on to policyholders. Unfortunately, the Republican tax package, as it heads to conference committee, would repeal this deduction specifically from affiliated offshore companies by levying an excise tax on these transactions.

If enacted, the policy would hamper the ability of reinsurers to spread their risk — which would increase the cost of reinsurance protection. A study by researchers at the Brattle Group concluded that the elimination of the current deduction from reinsurance premiums would reduce the supply of global reinsurance and cost American consumers an additional $5 billion. Because 90 percent of Florida’s reinsurance coverage comes from these offshore affiliated companies, Floridians would experience an estimated $259 million cost increase, amounting to a $100 average increase per household — and higher in places like Southeast Florida — for the same coverage they have today.

Even worse, these figures do not take into account the insurance rate increases many policyholders are going to experience regardless of what Congress does to financially recover from some of this year’s hurricane losses.

In short, given that reinsurance factors greatly in the calculation of property insurance premiums, Florida consumers would bear the brunt of Congress’ action through higher insurance rates. It is not a stretch to say that, as part of tax reform, Congress is considering a hurricane recovery tax that would substantially nullify the tax benefits otherwise produced by the underlying bill.

The need for tax reform is obvious, but there are ways to do it without undermining our state’s ability to financially protect itself from catastrophes. Florida’s insurance commissioner, state legislators, the Florida Insurance Consumer Advocate, business groups including the Florida Chamber of Commerce, and others have warned against the hurricane recovery tax. It’s past time that Florida’s large and influential congressional delegation do their part to put the brakes on this noxious proposal.

Given Florida’s vulnerability to hurricanes, the availability and affordability of reinsurance protection is critical to the state’s economic health and security.