Hurricane Ida made landfall last week as a Category 4 storm that experts said might have been the strongest to hit Louisiana in 165 years. The storm caused power outages for over one million Louisiana residents. While Louisiana was better prepared for Ida after the devastation caused by Hurricane Katrina 16 years ago, the damage from Hurricane Ida remains in the tens of billions of dollars.
Given the damage caused by one of the first storms of what could be a devastating season, it is hard to understand the logic behind the Biden administration’s Made in America Tax Plan (MATP), which would raise insurance premiums, particularly for climate-related catastrophes.
In a new policy study, the R Street Institute examines how the MATP will increase the cost of insurance in the United States by at least $10 billion per year. Specifically, the plan would increase the corporate tax rate from 21 percent to 28 percent. This increase would then be passed on to U.S. insurers and homeowners, which means the average family in some states will experience increases of $250 to $450 per year. In addition, the plan would increase the cost of insurance indirectly, by raising the cost of reinsurance for U.S. insurers, who rely on global markets to diversify and transfer risk.
While these changes will affect the cost of insurance for all U.S. consumers, the price increases will be largest for those living in areas exposed to catastrophic climate events (e.g., hurricanes, earthquakes, tornadoes, floods and wildfires).
“The expected increase in the cost of insurance will be between $10.8 billion and $20.3 billion per year, depending on the tax rates ultimately chosen by policymakers. As these tax increases are passed through to consumers, they will effectively tax everyone who buys insurance, regardless of income,” said Jerry Theodorou, director of R Street’s finance, insurance, and trade policy team.
However, Biden’s plan reaches beyond the United States. The nation relies heavily on foreign reinsurance markets because of its enormous exposure to natural catastrophes. Bermudan reinsurance companies in particular are crucial to the United States’ ability to finance the costs of catastrophes, exacerbated from the impacts of climate change. In fact, markets in Bermuda and Europe have historically provided protection for severe natural catastrophes as well as man-made catastrophes, such as the 9/11 terrorist attacks. Bermuda (re)insurers alone covered more than 30 percent of the $100 billion insured U.S. losses caused by hurricanes Harvey, Irma and Maria in 2017.
When the price of insurance increases, fewer families will purchase insurance, increasing the costs paid by the U.S. government as disaster aid through the Federal Emergency Management Agency (FEMA). As we watch FEMA teams work around the country to deal with the impact of Hurricane Ida, we must seriously consider how much FEMA can achieve on its own as the frequency and severity of catastrophic storms continues to climb.
