As previously discussed here, the government of El Salvador has been considering imposing a tax on premiums ceded to reinsurers. The original proposal was for a 10% tax, but the government has lowered that proposal to 5% (the proposal still includes a 25% tax as to reinsurers located in jurisdictions considered to be tax havens). In response, the Salvadoran Insurance Association (ASES) recently proposed a 3% tax and warned that a 5% tax would likely lead to the departure of at least eight foreign reinsurers from the jurisdiction. The tax proposal is expected to go to a vote within the next week.
A departure of any significant number of reinsurers from El Salvador would likely decrease insurance capacity and increase insurance premiums for many purchasers. Even more significantly, however, such a result would leave the local market in serious peril in the event of another significant catastrophe. By way of illustration, reinsurers are expected to pay nearly 38% of the insured damages incurred from Hurricane Ida and 97% of the insured damages from this year’s earthquakes in January and February. Reinsurers have also been instrumental in funding reconstruction in El Salvador after previous hurricanes such as Hurricane Stan. In the absence of such risk transfer, there is serious question whether local Salvadoran insurers could sustain a major natural disaster.