Brattle Report Highlights The Economic Impact Of The Offshore Affiliate Reinsurance Tax

A report co-authored by economists at global consulting firm The Brattle Group finds that newly-proposed tax legislation aiming to defer the recognition of affiliated offshore reinsurance for U.S. tax purposes will negatively impact businesses and consumers in the United States.

The report shows that reinsurance is critical to risk management in the U.S. property and casualty (P&C) insurance industry, particularly for natural catastrophes and other infrequent but high-loss events. Affiliate reinsurance is central for the insurance groups because it addresses the problems of adverse selection and moral hazard, and also allows for efficient intragroup capital management. The new anti-affiliate-reinsurance tax proposal will adversely affect U.S. homeowners and businesses, who will likely encounter reduced availability and higher prices for property and casualty insurance for infrequent but high-loss events. The report also predicts a higher negative impact of the border adjustment tax, a component of House Republican’s Blueprint tax reform proposal.

“Our analyses show that the new proposals would lead to a degradation of the ability of firms to manage risk, both inside and outside the P&C industry,” noted Dr. Michael Cragg, Principal and Chairman of The Brattle Group. “It would widen the protection gap between insured and uninsured losses, which would result in the excess risk falling on the government, particularly for natural catastrophes and other high-loss events.”

The report, “The Impact of Offshore Affiliate Reinsurance Tax Proposals on the U.S. Insurance Market,” was sponsored by the Association of Bermuda Insurers and Reinsurers (ABIR) and co-authored by Dr. Lawrence Powell, the Director of the Alabama Center for Insurance Information and Research, Brattle Principals Drs. Michael Cragg and Bin Zhou, and Senior Associate Jehan deFonseka.

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