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April 24, 2014

Obama Budget Proposal a Mixed Bag for Risk Managers

President Barack Obama released his budget proposal for the 2014 fiscal year on April 10. Media attention has focused on its plan to reduce the nation’s deficit. But for risk managers, the budget is also noteworthy for two other reasons: what it includes and what it doesn’t.

As in years past, the administration’s budget includes a provision that would eliminate the current tax deduction for reinsurance premiums ceded by domestic insurers to foreign affiliates. Many in the industry, including RIMS, have expressed their opposition to this provision being included in any final budget.

In an April 15 letter to the House Ways and Means Committee, RIMS stated that the administration’s proposal would have “demonstrable negative implications for the global reinsurance market and the United States businesses that rely on this market” and would have a “chilling effect on the use of foreign reinsurance.” (View the full letter for a deeper explanation of the tax deduction.)

The Coalition for Competitive Insurance Rates (CCIR) published a study in 2009 (with an update in 2010) that found eliminating the tax deduction would lead to a 20% reduction in the overall supply of reinsurance available in the U.S. market.

This would in turn lead to consumer price increases of at least $11 billion and up to $13 billion annually.

A brighter spot for risk managers comes from an item not found in the administration’s proposed budget: a cut to the Terrorism Risk Insurance Act.

In President Obama’s first few budgets, support for TRIA was significantly reduced. In his proposed fiscal-year 2011 budget, for example, the administration called for eliminating nearly $250 million in federal subsidies to insurance companies for terrorism insurance; increasing deductibles and copays for insurers that participate in the program; and eliminating coverage for acts of domestic terrorism.

With TRIA set to sunset at the end of 2014, the industry looked to this year’s budget proposal for a sign on where the president stands on the issue. While not including a cut for the program in a budget proposal is not the same as support, it is viewed as a positive sign that the administration will get behind an extension.

It should be noted that government’s final budget rarely looks anything like the initial proposals put forth by the administration and Congress. While President Obama has included the reinsurance tax provision in the past, that provision has never been included in any final agreement. The same holds for years in which the administration included cuts to TRIA.

The administration’s initial budget proposal does still carry weight, however.

And what is — and is not — included remains notable for risk managers and worth keeping an eye on going forward.

Risk Management Magazine and Risk Management Monitor. Copyright 2014 Risk and Insurance Management Society, Inc. All rights reserved.

About the Author

Senior Government Affairs Manager

Nathan Bacchus is senior government affairs manager at The Risk and Insurance Management Society (RIMS).

212-655-5922

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