Hit by market volatility in the early months of the pandemic, weaker premium growth and a high volume of contingency, travel and business interruption claims, a recent survey[i] suggested that the industry expects the new administration’s policies will be largely positive for it or at least not worse than the status quo. What might be in store for the industry?
The American Rescue Plan
The election of Joe Biden as president of the United States and his inauguration in January 2021 mark a sea change in federal economic policy from conservative dogma (that tax cuts to the wealthiest increase investment in the job-creating economy and aid to the underprivileged is inimical to innovation and individual investment) to a more Keynesian approach dubbed “Bidenomics”.
President Biden's economic programme envisages the massive use of federal money, first by promulgating a rescue plan to combat the economic recession caused by the COVID-19 pandemic and its effects on public health in the United States and then, when normality has returned, structural reforms affecting healthcare, education, infrastructure and clean energy, while supporting an increase in the minimum wage and measures to stimulate unionisation. The programme comes at a time when the cost of borrowing is almost free and the United States is in the midst of a national crisis (with, for example, unemployment at its highest point in a generation and between 30 and 40 million Americans reportedly at risk of eviction from their homes as of January 2021[ii]) and its infrastructure no longer first world. The Biden campaign described the proposals as the largest mobilisation of public investments since the Second World War.
The first phase of President Biden’s economic programme began on 11 March 2021, when he signed the American Rescue Plan Act, providing for the injection of US$1.9 trillion of public money into numerous corners of the American economy. With the two stimulus plans of 2020, the American Rescue Plan Act brings the total amount of federal aid to combat the effects of the COVID-19 pandemic to US$6 trillion, by far the most aggressive response since the Great Depression.
Various monitoring and policy organisations have endorsed the domestic growth potential of the American Rescue Plan. The Institute on Taxation and Economic Policy[iii] found that components of the Plan would increase the incomes of the bottom 60 per cent of Americans by an average 11 per cent and increase the incomes of the poorest 20 per cent by an average 33 per cent. The Organisation for Economic Co-operation and Development (OECD) predicts that the American Rescue Plan will help the US economy grow at a rate of 6.5 per cent during 2021, its fastest annual growth since the early 1980s.
A strong economy will have positive effects on consumption and, indirectly, on the insurance industry. An increase in consumer spending in retail, hospitality, and transport sectors would have positive repercussions within the insurance industry. It could also ameliorate the weaker premium growth that the life industry, in particular, has experienced during the pandemic.
True, rising consumer-spending could cause inflation to increase with potentially adverse consequences for the adequacy of insurers’ reserves.
On the other hand, if inflation meant an end to ultra-low interest rates, it would mitigate one of the most significant sources of risk to insurers, being investment performance and yields.
Rise In The Rate Of Corporation Tax
President Biden is looking to fund part of the fiscal stimulus by raising corporation tax rates from 21 per cent to 28 per cent (the rate having been cut from 35 per cent during the Trump administration). Additionally, Washington has come out in favour of a global minimum tax rate and talks within the OECD on steps to reduce base erosion and profit shifting have restarted with vigour.
A rise in the rate of tax on corporate profits is, of course, likely to have the same impact on the domestic insurance industry as on any other domestic market. However, Biden’s campaign manifesto also anticipates a domestic minimum rate of tax of 15 per cent on book income. If implemented, this tax, in particular, could affect many United States’ insurance companies disproportionately.[iv]
Of course, Washington’s support for a global minimum rate is less concerned with ensuring other countries tax United States groups effectively and more with ensuring that the United States increases its own fiscal revenue. Finding global agreement on such a deal will be immensely challenging and there remains a wide range of potential alternative outcomes.
The world’s third largest insurance and reinsurance domicile is a jurisdiction which does not tax corporate profits: Bermuda. Some expect that the advent of a global minimum tax rate (assuming that the OECD does effectively organise itself to agree on one) will limit the appeal of Bermuda as an insurance domicile. However, this is unlikely. As has become apparent, after years of tax reform in the US and other onshore jurisdictions, such as to erode to a nubbin any tax-related advantages of a Bermuda affiliate, the appeal of Bermuda as a domicile for insurers lies in matters unrelated to tax: transactional efficiency, an experienced and highly-regarded regulator, a flair for innovation and a high concentration of professional excellence and expertise among its service providers. Since these factors are not tax-related, the attraction of the island as a domicile is unlikely to be affected by the latest proposals.
New Direction In Climate Policy
As is well-known, the fortunes of the insurance industry are intimately linked to the production and distribution of energy sources, including fossil fuels.
President Biden can be expected to impose stricter regulations on businesses across all sectors in efforts to reduce emissions. He has already put the United States back in the Paris Agreement and recently unveiled a plan to inject around US$750 billion into clean energy. He also aims to make the United States’ power plants, vehicles, mass transport systems and buildings more fuel efficient and less dependent on oil, gas and coal.
A change in climate policy is largely supported by the insurance industry, not least if it is seen to have the potential to mitigate risks of extreme weather. The global insurance industry has, after all, been engaging with governments regarding the implementation of climate change mitigation measures for some time.
On the other hand, such legislation is liable to increase the volume of litigation. Property and Casualty (P&C) insurers are already marking an emerging trend of climate change-related litigation for some years (and not just in the United States; see, for example, the pending action against oil super-major, Royal Dutch Shell, before The Hague District Court in the Netherlands).[v] Such litigation means an uptick in casualty, environmental impairment, and directors’ and officers’ liability insurance claims.
Insurance Regulation/Risk-Based Insurance Pricing
President Biden is expected to increase the focus on consumer “best interest” protection. Within the context of social equity and inclusion, State legislatures also have signalled an increased attention to rating and underwriting factors as well as the use of big data and artificial intelligence. These developments have the potential to hit the life insurance market, motor, and homeowners’ property insurance market most heavily.
Insurers will need to work hard to ensure the market discipline that risk-based pricing brings can continue, such as getting insurance products to the consumers at the best possible price.
A More Intrusive FED?
Some predict that the federal Financial Stability Oversight Council, under the leadership of Treasury Secretary Janet Yellen, may reintroduce the view (last seen during the Obama administration) that large financial groups holding insurance companies are liable to be designated as “systemically important financial institutions” (SIFIs), putting prudential supervision of such groups under the auspices of the Federal Reserve. Beginning with the designation of AIG, the Obama Administration saw a trend towards classifying large groups, including insurance companies, as SIFIs, with Prudential and MetLife following on the heels of AIG. MetLife successfully appealed their designation on the basis that the Council acted arbitrarily in making it. Under the Trump administration, further avenues of appeal were not pursued. Under the Biden administration, we could see a return to the earlier, more aggressive approach.
The Biden Administration is expected to move United States foreign policy back towards diplomacy and the facilitation of international trade. What this will mean in practice is, naturally, hard to predict. An easing of US sanctions on Iran is a possibility, although the Biden administration will have to balance such a policy with the interests of Iran’s regional enemies, most notably Israel, for whom Biden has historically shown strong bipartisan support.
President Biden is unlikely to soften the tone of recent criticism of China’s foreign policy and tactics in international trade. He has accused China of violating international trade rules. The change in his administration is likely to be felt in a greater use of diplomacy. President Biden has doubted whether President Trump’s tariffs have helped and is more likely to seek to build defensive alliances against Beijing.
What would the consequences be for the global insurance market of a return to trade alliances and less aggressive use of trade tariffs? The trade credit and political risk insurance market has enjoyed considerable growth in premium income as a result of the geopolitical uncertainty during the Trump presidency (albeit tempered more recently by the drop in commercial activity as a result of the pandemic). Having said that, even with a more facilitative approach to international trade, with the international stage set such as it is, it is hard to imagine much of a dent in the demand for trade credit and political risk insurance for the foreseeable future.
With so many imponderables, very little is certain about the impact of Biden’s policies on the geopolitical landscape and the world economy over the next four years. Considering how easily and quickly a newly-elected President can undo the legacy of his or her predecessor, it would be helpful for the insurance industry to know whether President Biden’s stimulus and infrastructure plans and the interest brought to climate change represent a moment of political expedience, or more permanent changes. Unfortunately, this can only be known with the benefit of hindsight. There are a few things that one can be confident of now, however. For the domestic United States insurance industry, the days of low corporation taxes are over for some time. An increase in consumer spending might assist with a recovery of premium income levels but, in the United States, personal lines insurers will need to work hard to mitigate the excesses of new consumer protection proposals. A decline in protectionism and fewer swings in foreign policy might calm the geopolitical stage. This presents both challenges and opportunities. For everyone generally, there will, thankfully, be a lot less presidential tweeting.
[ii] Hackney, Suzette (December 17, 2020). “Millions of Americans face eviction amid COVID-19: 'I have no idea what to do.'” USA Today.
[iii] The Institute on Taxation and Economic Policy. Estimates of Cash Payment and Tax Credit Provisions in American Rescue Plan.
Nick is a partner in Kennedys’ Bermuda office whose practice encompasses insurance and reinsurance, insolvency and restructuring and banking and finance. He is admitted as a Barrister and Attorney in the Supreme Court of Bermuda and is admitted and enrolled as a Solicitor of the Senior Courts of England and Wales. He advises insurers, reinsurers, insurance intermediaries, policyholders and investors in the insurance industry on a wide range of regulatory and corporate matters, including the licensing of entities registered under the Insurance Act 1978, mergers and amalgamations, continuances and discontinuances and public and private offerings of securities. He advises clients from all industry sectors on restructuring and insolvency matters. He also advises on compliance with Bermuda’s new “economic substance” legislation. He is a committee member of the Restructuring and Insolvency Specialists Association of Bermuda.
Nicolas is a senior associate in Kennedys’ Bermuda office whose practice encompasses insurance and reinsurance, corporate finance and corporate restructuring transactions. He is admitted as a Barrister and Attorney in the Supreme Court of Bermuda, and qualified (not practicing) as a Solicitor in England and Wales and as Avocat in France. He advises insurers, reinsurers, insurance intermediaries and investors in the insurance industry on all aspects of Bermuda corporate law, regulatory and compliance matters, reporting and filing requirements, licensing of insurance companies (captives, special purpose insurers and commercial insurers). He also advises clients in all industry sectors on corporate finance, cross-border corporate restructuring, banking and finance transactions, and corporate governance.