The Salvadoran Insurance Association (ASES) is warning that a proposed tax increase on reinsurance premiums may cause a mass exodus of reinsurers, leaving the nation under-protected in the event of a natural disaster. As part of a lengthy fiscal reform proposal expected to be presented to the Legislative Assembly in the coming days, President Mauricio Funes reportedly intends to propose the imposition of a ten percent tax on reinsurance premiums. The average reinsurance tax in Latin America is only approximately 1.5%.
According to the ASES, six of the ten reinsurers active in El Salvador have already indicated that they would leave the market were such a tax imposed. This would be potentially devastating for El Salvador, which is vulnerable to various types of natural disasters and is highly dependent upon reinsurance to support recovery from such disasters. For example, when the nation suffered an earthquake in 2001, approximately 95% of the insured losses were ultimately paid by reinsurers. In the absence of such reinsurance, it is unlikely local insurers could have borne the loss.
As an alternative to the 10% across-the-board reinsurance premium tax, the ASES is proposing a 0.5% to 1.5% premium tax solely in the area of fire reinsurance and the imposition of long-discussed obligatory automobile insurance, which in itself would reportedly generate $10 million in revenue annually.