Reinsurance Tax Could Raise Life and Annuity Costs 3.3%: Analysts

In theory, a successful BAT system could raise $1 trillion in extra revenue over 10 years, Powell and his colleagues write.

No one has formally proposed applying a BAT to reinsurance, but if Congress did that, it could cause serious problems for issuers of U.S. life and annuity products, because about 59% of U.S. life insurer capitalization is attributable to reinsurance, the R Street analysts write. They estimate that U.S. life insurers get about 51% of their reinsurance from entities outside the United States.

If a BAT system imposed what amounted to a 20% tax on use of non-U.S. life reinsurance, that would start out sucking $5.4 billion in capital from the U.S. life sector per year, the analysts predict.

The amount of capital flowing out of the sector each year would decrease over time, but it would produce about $59 billion in capital costs over a 20-year period, the analysts write.

The decrease in U.S. life sector capital would increase the cost of U.S. life insurance and annuities by about 3.3%, and, all other things being equal, that would cut U.S. life and annuity sales by about $25 billion over 20 years, the analysts predict.

— Check out Waldeck to Lead Prudential Retirement on ThinkAdvisor.