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What the 2015 State of the Union Means for Risk Managers

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state of the union 2015

Last night, President Obama delivered the annual State of the Union. Unsurprisingly, the speech covered a variety of topics ranging from foreign affairs to civil rights to climate change. While these issues may ultimately have little impact on the insurance industry or risk management, there were two topics raised that could be of significant interest.

The first relates to tax reform:

“As Americans, we don’t mind paying our fair share of taxes, as long as everybody else does, too. But for far too long, lobbyists have rigged the tax code with loopholes that let some corporations pay nothing while others pay full freight. They’ve riddled it with giveaways the superrich don’t need, denying a break to middle class families who do,” Obama said.

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For the past few years, the Obama administration’s annual budget proposal has included a measure that would deny a tax deduction for certain reinsurance premiums paid to foreign-based affiliates by domestic insurers. While the administration and some members of Congress deem this deduction a “loophole,” it is actually a commonly used and effective risk management tool.

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Doing away with this particular “loophole” would force the industry as a whole to reduce the size and scope of its U.S. offerings. A previous economic impact study found that this proposal would reduce the net supply of reinsurance in the United States by 20%, thus increasing prices by to billion annually for the same coverage.

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If Congress does take up comprehensive tax reform, this is certainly an initiative that many in the industry will need to keep an eye on.

The other issue is cybersecurity:

“And tonight, I urge this Congress to finally pass the legislation we need to better meet the evolving threat of cyberattacks, combat identity theft, and protect our children’s information. If we don’t act, we’ll leave our nation and our economy vulnerable. If we do, we can continue to protect the technologies that have unleashed untold opportunities for people around the globe,” the president said.

Cybersecurity and the management of cyberrisks is certainly one of the hottest topics in the industry. While it remains unclear what proposed legislation will look like, we will almost certainly see at least one major piece of cybersecurity legislation introduced in the next few months. Previous efforts have focused on information-sharing. With the number of attacks and damage inflicted only increasing, however, it is quite possible that new legislation may be even broader in scope.

It is also important to note that simply including something in a State of the Union address does not always translate into real action. It is quite possible that tax reform will get tabled again as various factions are unable to agree. It’s also possible that Congress will be unable to come up with a cybersecurity bill that achieves many of its goals without undermining the privacy or personal security of individuals. It is, however, an overview of the administration’s priorities for the coming year, and that does still carry some weight.

Colorado Flood Damage Estimated at Over $2 Billion

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Colorado River at Flood Level

Economic damages from the recent flooding in Colorado are expected to surpass $2 billion, according to a recent report from catastrophe risk modeler Eqecat. Most of that financial burden will fall on residents because very little flood risk is insured in the state.

Between 1,500 and 1,800 homes have been destroyed and thousands of homes have been damaged, leaving more than 10,000 people displaced. The estimated total cost to repair destroyed homes averages $300 million and early reviews of residential flood damage indicate an average of $20,000 to restore each of the 17,500 flooded homes that were not destroyed. But because of exclusions to the basic homeowners insurance policy, most of the losses will not be covered by insurance.

Historically, a very small portion of homeowners purchase flood insurance on homes outside of the 100-year flood zones outlined by the U.

S. National Flood Insurance Program, which provides insurance as part of a mortgage. Of the 17 counties impacted, most of the areas are not within defined flood zones.

President Obama declared a major disaster in nine of the hardest-hit counties, making residents eligible for direct federal grants to repair their flood-damaged homes, replace personal property and provide rental assistance, Reuters reported. This status also allows workers left jobless by the disaster to claim unemployment payments of up to 26 weeks and makes special low-interest loans available to farmers and small businesses to help cover their uninsured flood losses.

While these measures may help with immediate need, the extensive damage will require months of recovery and more rain is currently expected to cause rivers to crest another foot above flood stage today. With hundreds of miles of road flooded and many bridges and dams damaged or destroyed, Eqecat estimated losses to commercial and government properties and related expenses to total around $1 billion. Colorado officials announced a Dec.

1 target to complete temporary fixes to at least some of the heavily damaged roads, according to the Weather Channel. State highway crews and National Guard troops have already begun work to repair highways to mountain towns cut off by the flooding – roads that will only lead to more treacherous situations in remote areas as winter approaches.

Residents of one town have been told they will be displaced for up to six months, according to NBC News. Lyons town administrator Victoria Simonsen told a public meeting last week that E. coli bacteria had contaminated the drinking water system and the wastewater system incurred at least $1 million in damage, leaving the town unlivable for the foreseeable future.

This morning, authorities announced the eighth confirmed death from the flooding. Reuters reported that the search for hundreds of missing residents is winding down, with all but a half-dozen people now accounted for.

Obama Budget Proposal a Mixed Bag for Risk Managers

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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.

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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 billion and up to 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.

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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.

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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.