The Federal Insurance Office (FIO) should have the “ability to immediately estimate exposures related to catastrophic events” and provide it to the Federal Government.
That’s according to the “vision” for the FIO spelled out in the proposed 2014 U.S. budget released today.
Such events include the Sept. 11 terrorist attacks or Hurricane Katrina.
The proposed budget noted that the FIO’s Federal Advisory Committee on Insurance (FACI) demonstrated its responsiveness to reacting to disasters by holding a public meeting soon after “Hurricane Sandy struck the East Coast of the U.S. to discuss the future of flood insurance.”
The budget document calls Sandy a hurricane but insurers call it a superstorm.
It notes under the section Streamlined Insurance Sector Regulation that the FIO was established by the Wall Street Reform Act to “monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to” systemic risk.
Some in the industry, fresh from watching the claims aftermath of Superstorm Sandy unfold, say that this vision has a long way to go, as even with insurers now after a disaster, it takes a lot of time to amass data while in the thick of the assessment and disaster response process, and not every party is even doing it the same way.
“There are real world limitations to how fast real-world data can be obtained by anyone, and have the data requests be uniform and be at a time when insurers can actually provide it and not all of their resources are being spent paying claims and fulfilling consumer business,” said Dave Snyder, vice president of Property Casualty Insurers Association of America (PCI).
Snyder also noted there is the need for confidentiality to be maintained when filing all of this data.
“Insurers need realistic, confidential and uniform data collection after major events and we hope that FIO can play a helpful role, but we don’t see it substituting for the states,” Snyder said.
The budget also proposes some tax changes that could impact the very catastrophe coverage and response issues which FIO is interested in tracking.
The proposed budget also seeks to disallow a deduction for nontaxed reinsurance premiums paid to foreign affiliates, which has some property casualty insurance interests concerned.
Under the proposal, U.S. insurance companies would be denied a deduction for certain nontaxed reinsurance premiums paid to foreign affiliates under the proposed budget.
This would be offset by an exclusion for return premiums, ceding commissions, reinsurance recovered, or other amounts received from such affiliates.
“This proposal represents a protectionist and economically destructive tax that would benefit a small group of domestic insurance companies at the expense of U.S. consumers,” said R Street Senior Fellow R.J. Lehmann. “Its ultimate effect would be to drive reinsurance capital – so sorely needed in catastrophe-prone states like Florida, Louisiana, Texas and California – out of the country.
“In addition to making reinsurance more costly and limiting access to the global reinsurance industry, which allows catastrophe insurance to function by pooling a wide variety of different kinds of risks from around the world, the proposal is unnecessary,” Lehmann added.
The proposal is projected by the Office of Management and Budget (OMB) to raise $2.62 billion over the next five years and $6.21 billion over the next decade, but Lehmann cites analysis that claims the new tax would reduce the net supply of reinsurance in the United States by 20 percent and increase the cost U.S. consumer pay for insurance by $11 billion to $13 billion annually.
“The plan would amount to taxing a company differently based on where its corporate headquarters is located, which violates the basic WTO principle that a member country cannot treat foreign firms differently than domestic firms,” Lehmann said. “But even before a WTO grievance would be filed, this proposal would almost certainly result in retaliatory actions by foreign jurisdictions against U.S.-based enterprises abroad, sparking a destructive trade war amid what are already very trying times for the global economy.”
FIO did not respond, but the U.S. Treasury office put out a statement in support of the budget.
“The president’s budget puts our nation on a fiscally responsible path by shrinking our deficits in a balanced way and making targeted investments to grow our economy that are fully paid for. Treasury is carrying out its mission more efficiently and at a lower cost to the taxpayer, while taking critical steps to strengthen the recovery, restore confidence in the financial system, bolster the housing market and meet our international obligations,” said Treasury Secretary Jacob J. Lew.
The NAIC does not have a response to the budget at this time. A response from other groups is pending.