Reinsurance costs rose for U.S. P&C insurers on BEAT tax & losses

The results of the U.S. property and casualty insurance sector were affected by higher reinsurance related expenses after the implementation of the BEAT tax and higher catastrophe losses, according to A.M. Best.

In a recent report A.M. Best highlighted the impact of the base erosion and anti-abuse tax (BEAT) which was part of the 2017 Tax Cut and Jobs Act.

This tax made it more challenging for United States insurance and reinsurance companies to shift risk offshore to certain locations and had a noticeable affect on the use of quota shares, A.M. Best said.

The BEAT tax was widely discussed before its enactment, but little has been said on how it actually impacted the reinsurance market.

But quota shares are a clear example of how the changing ability to flow risk and capital offshore affected the U.S. insurance marketplace.

In 2018, the result of the BEAT tax was that net premiums written by U.S. P&C insurers rose significantly, as changes to reinsurance programs were made in response to the tax implementation.

“The 2018 premium increase was accompanied by a corresponding increase in losses and expenses as quota-share reinsurance arrangements with off-shore affiliates were revised or cancelled,” the rating agency said.

While the increase in net premiums was “unusual” it also read across into losses and expenses, given the impact on offshore quota share reinsurance arrangements.

“As many of the internal reinsurance agreements that were revised to avoid BEAT were on a quota share basis, losses and expenses increased as well,” A.M. Best explained.

Also impacting U.S. P&C insurers in recent years is the increased cost of reinsurance, as P&C reinsurers looked to lift rates to better account for the heavier loss activity they suffered in recent years.

A.M. Best said that this could continue, with an expectation of increasing reinsurance costs for P&C insurers at the mid-year 2020 renewal season.

Quota shares have returned to favour, but are still not as widely used perhaps as they were in 2017 by this group of U.S. P&C insurers.

The expectation is that reinsurance expenses will continue to rise for this group, especially as reinsurers are hoping to increase pricing more at this years June and July reinsurance renewals than they managed in 2019.