Florida State Representative Opposes Reinsurance Tax Bill

On behalf of the citizens of Florida, I want to join our state's Consumer Advocate and countless others in opposition to HR 3424. I also want to enter into the record the previous letters of opposition to this proposal and similar reinsurance tax proposals in Congress from my colleagues in the Florida House of Representatives and the Florida Senate, namely Senator Garrett S. Richter (Chair, Senate Banking and Insurance Committee), Rep. D. Alan Hayes, M.D., Rep. Will Weatherford, and Rep. Kevin Rader. Copies of their previously submitted letters are attached.

This bill creates an arbitrary, discriminatory tax on foreign reinsurers which enter into affiliated reinsurance agreements with their US subsidiary corporations. The impact of this proposed punitive tax will be to cut off parental support for these US based insurance companies. The companies would then have to either cancel some of their existing business to make do with the capital contained in the US corporation, purchase additional replacement unaffiliated reinsurance or raise more capital to maintain their US business. The bottom line is that reinsurance costs will rise; the higher costs of this reinsurance would be passed on to the policyholders in our state, who are already suffering deeply from a struggling real estate market, increasing insurance costs, and even the Deepwater Horizon oil spill. If substantial amounts of reinsurance would not be available, as suggested in the report written by the Brattle Group with Professor David Cummins, then the impact will be to leave our state's insurer, Citizens Property Insurance Corporation ("Citizens") and our state's reinsurer, the Florida Hurricane Catastrophe Fund ("FHCF") left with the obligation to pay for additional amounts of hurricane claims at a substantial cost to our citizens.

As a member of the Florida House of Representatives' Insurance, Business & Financial Affairs Policy Committee, I understand why affiliated reinsurance is important. It serves to transfer risk to another entity with a larger capital base. This flagship enterprise is then able to diversify its risk by absorbing risk from around the world that is disconnected by time, type of peril and geographic location. As citizens of the state of Florida we are keenly aware of our risk concentrations and appreciate that affiliated reinsurance serves to diversify rather than concentrate risk and as a result allows more reinsurance to be written at a better price than otherwise would be the case. The impact of HR 3424 is to disrupt this diversification mechanism and to concentrate risk in the US and force the US subsidiary to absorb higher capital costs.

According to the Brattle report, the ill-designed reinsurance tax mechanism itself will disqualify more than 80% of the affiliated reinsurance purchased by non US insurance groups operating in the US. As this affiliated reinsurance is replaced with either capital or unaffiliated reinsurance, the cost of unaffiliated reinsurance will rise for property reinsurance by about 6%. This is the primary impact that will be felt by our windstorm authority, Citizens. We will be forced to pay higher reinsurance costs. Furthermore, since a supply demand imbalance in the market is created, we also may not be able to buy all the reinsurance we would want to purchase in any given year. Of great concern as well, is that the higher costs may discourage home insurance purchase in the private market, and thus increase pressure for subsidized insurance to be offered in our residual market. The Brattle Group report notes that the purchase of home insurance coverage would be expected to decline by 2.3% on a national basis For coastal consumers which are dependent on reinsurance to manage the high severity and frequency of hurricane claims, the impact of the discriminatory unaffiliated reinsurance tax will be harmful. It will result in higher prices and likely a larger influx of consumers into the taxpayer subsidized residual market pools. Thanks for the opportunity to present our views. We'd be glad to discuss this matter further.