Pre-Event Catastrophe Reserves An Update

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Pre-Event Catastrophe ReservesAn Update

• Kay Cleary
• September 2003 Chicago, Illinois

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Summary of NAIC Proposal

• Federal Income Tax deferral
• Voluntary
• Cap on total amount is sum of by-line subtotals
• For each eligible AS line of business
• Qualifying line Written Premium
• times
• Factor for that line

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Current applicability

• Property lines only
• Specified perils only

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NAIC Proposal

• 20-year phase in
• Tax-deferred contributions taxed in year of draw
  down

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Proposed Accounting

• Balance Sheet
• Income Statement
• Notes to Financial Statements

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Paying Catastrophe Claims

• Qualifying events
• Amount to be withdrawn

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Status of NAIC Proposal

• No activity on federal tax change
• RBC treatment
• Accounting treatment

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Potential Revisions to NAIC Proposal

• Review factors update needed?
• Terrorism
• Workers' Compensation
• Other, including non-PC lines

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SAP Statement of Concepts

• Conservatism yes
• Consistency no
• Recognition probably OK

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Accounting Treatment

• Definition of liability (SSAP 5, FASB Statement
  of Concepts 6)
• Pre-Event (SSAP 55)
• Matching of income and expenses

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Tax Issues

• Fewer tax dollars from industry.
• Offset elsewhere?

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Liability or Special Surplus?

• Should be surplus? (SSAP 72)

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Voluntary Reserve

• Consistency
• SSAP 60 if mandatory

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Considerations

• New entrants
• M A's
• Cease writing line(s) of business
• Company vs. Group

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Comments Received

• Inefficient on an industry level?
• Inefficient use of capital?

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International Accounting

• Equalization reserves
• Catastrophe reserves

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Why set up a reserve?

• Mandatory
• Best use of for purpose
• Federal income tax
• Compare to other uses
• Mixture of tools

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Summary

• Federal tax revision?
• Accounting?
• Additional lines and perils?
• Design modifications?
• Significant, appropriate, fair incentive?