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U.S. border-adjustment tax on life cover reinsurance could hurt the economy

6th July 2017 - Author: Staff Writer

Think tank R Street has warned a U.S. border-adjustment tax (BAT) on internationally sourced reinsurance for life insurance and annuities could have a far-reaching negative impact on the U.S. economy – by staving off capital influx and thus economic investment, while making insurance unaffordable to citizens most in need of a safety net.

Declining reinsurance profitsA BAT would raise the cost of life insurance and annuity products by $59 billion over the next 20 years – and these higher prices would likely result in $24.6 billion less life insurance and annuities being purchased, according to R Street estimates.

This would have a severe knock-on effect for the U.S. economy, R Street said, since 75% of every new premium dollar is typically reinvested by life insurers back into fixed-income debt markets.

According to a model developed by economist Marco Arena, consequences could be as severe as a drop in gross domestic produce by about $1 billion for every $6.7 billion less in life insurance premiums.

By shrinking supply of capital to U.S. life insurers, a BAT would hit the primary life insurance market, “because life reinsurance contracts remain in effect as long as the life insurance policies they support.

“Therefore, existing life reinsurance contracts would create significant new costs to support policies already in force. Some of this cost would be passed on to consumers, while the rest would result in reduced capital to support new policies.”

Higher costs for consumers means a reduction in the purchase of life and annuity products – and this would mean less of the population receives vital support in emergency scenarios, and the State would be left to pick up the pieces – with expanding federal welfare programmes as well as a possible increase of the federal Pension Benefit Guaranty Corp’s obligations.

“Life insurance and annuities prevent financial devastation for a large number of people each year. By keeping family incomes above the poverty threshold following a premature death, disability or retirement, government outlays for means-tested safety net benefits are reduced,” the R Street report said.

For these reasons, the R Street report points to the fact that developed nations “that employ the conceptually similar value-added tax (VAT) system almost universally exempt financial services like reinsurance from the tax.”

The Think Tank had previously warned of the impact of a border tax on the U.S. property market, stating Florida would feel a striking impact with premiums costs increasing between $1.4 and $2.6 billion annually simply to maintain coverage as it exists today.

R Street, concluded; “Policy developments limiting the availability of such capital produce a cascade of negative effects for Americans across the country and from all walks of life.

“Vital and unexpected elements of day-to-day life are simply not achievable without affordable insurance – a BAT places that affordability in jeopardy.”

These findings show that in the long-term, the introduction of a BAT for international reinsurers would be self-sabotage on the U.S. economy: less reinvestment of capital and less social security otherwise purchased through life insurance and annuities would leave increasing amounts of the population destitute, growing the inequality divide and contributing to economic stagnation.

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