LA Insurance Commissioner Donelon: Taxes Could Hurt Industry
Taxes Could Hurt Industry
October 21, 2012 By James Donelon
Hurricane Isaac battering Louisiana but, thankfully, sparing New Orleans’ rebuilt and reinforced levees — caused insured losses estimated between $700 million and $2 billion, according to the catastrophe modeling firm AIR Worldwide.
The hurricane’s havoc included wind and storm damage to residential, commercial and industrial properties and automobiles, as well as the costs resulting from business interruptions and additional living expenses.
Disastrous as this damage was, it’s not as severe as the devastation from last year’s Hurricane Irene, which caused an estimated $5 billion in insured losses in the United States, according to the Insurance Information Institute.
In addition to the ever-present threat of hurricanes, another destructive development is imperiling US homeowners and businesses. US Rep. Richard Neal (D-MA) and Sen. Robert Menendez (D- NJ) are working together for legislation that would impose costly new taxes on the very insurance companies that provide the backup coverage that’s indispensable for the nation’s residential and commercial properties. In fact, this proposal is included in President Obama’s budget for Fiscal 2013.
Whether we face hurricanes on the Gulf Coast, earthquakes in California, tornados in the Midwest, or the threat of terrorism in New York, global reinsurance is essential for American consumers and businesses. By spreading insurance risk throughout the world, rather than just across our state or nationally, global insurance companies provide nearly two-thirds of all reinsurance in the US.
For instance, in 2005, more than 60 percent of the payments for the terrible trio — hurricanes Katrina, Rita and Wilma — came from foreign insurers and reinsurers. Targeting these global insurance companies for special punitive taxes would be burdensome for homeowners, businesses and our overall economy, especially in areas such as the Gulf Coast that are vulnerable to natural disasters.
In an economic impact study of the Neal-Menendez bill, published in 2009, updated in 2010 and reviewed in 2011, the Brattle group, a leading economic consulting firm based in Boston, found that the proposed tax would reduce the net supply of reinsurance in the US by 20 percent.
As we learn in basic economics, when you reduce the supply of something, you raise its price. Therefore, the Brattle Group estimates that the special tax would increase the price of insurance in the US by 2.1 to 2.4 percent and as much as 9 percent in some lines of business. Across the country, in order to obtain their current levels of coverage, consumers would have to pay a total of $11 to $13 billion more annually.
In Louisiana, the tax would hit homeowners and businesses. The price of homeowners’ multi- peril insurance would rise by 1.4 percent resulting in $21 million per year in added costs for families, while the price of commercial multi-peril insurance would increase by 5.5 percent, costing $28 million in additional payments for businesses.
With unemployment at 7.6 percent in Louisiana, these price hikes on hurricane insurance would increase the uncertainty in our already shaky economy. Our hard-pressed homeowners and our hard-working entrepreneurs and employees deserve better.
In Louisiana and throughout the nation, Americans should ask our Senators and Representatives to oppose this punitive tax that would fall largely on our consumers and businesses. As we recover from Hurricane Isaac, we need a robust insurance market, open to as many competitors as possible, domestic and international. We don’t need a perfect storm of higher taxes and increased insurance costs.
James Donelon is the Louisiana Commissioner of Insurance.
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