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Tax Deductible, Pre-Event Catastrophe Reserves

Tax Deductible, Pre-Event Catastrophe Reserves. Kay Cleary Casualty Loss Reserve Seminar September 13, 1999. Topics. Calculation of reserves Annual statement changes Issues. Calculation of Reserves. Annual accumulation Caps Paying losses. Annual Accumulation.

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Tax Deductible, Pre-Event Catastrophe Reserves

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  1. Tax Deductible, Pre-Event Catastrophe Reserves Kay Cleary Casualty Loss Reserve Seminar September 13, 1999

  2. Topics • Calculation of reserves • Annual statement changes • Issues

  3. Calculation of Reserves • Annual accumulation • Caps • Paying losses

  4. Annual Accumulation • (Factor) x (Direct Written Premium) • Factor is by line and by state • Direct Written Premium is net of pro rata reinsurance • Resulting $ summed for all lines • Adjustment for other risk transfer

  5. Caps on Aggregate Reserve Balance • Effective cap is lesser of • 20 x current year amount • net PML • “calculated using common industry practice to determine the insurer’s estimate of its exposure to future catastrophe amounts” • Reserves > 40 years old are released

  6. Qualifying losses • Losses • “Direct” Loss Adjustment Expenses • Assessments, surcharges and other liabilities attributable to a qualifying catastrophe • Net of reinsurance

  7. Triggers for Loss Payments • Qualifying losses more than X% of previous year’s effective cap • 20% from single cat with >$10B industry losses • 40% from all cats during calendar year • Qualifying losses > 15% company’s surplus

  8. Example: TriState Megacat • Business in CA, FL, IL • Multiline company • 1998 year end surplus of $100M • Reserve in effect 15 years

  9. TriState MegaCat California

  10. TriState MegaCat Florida

  11. TriState MegaCat Illinois

  12. TriState MegaCat Annual Accumulation • $575 (CA) + $386 (FL) + $524 (IL) = $1,485 • $1,485 x .926 (xs reinsurance adjustment) = $1,375 • previous year end reserve = $20,000 • new total = $20,000 + $1,375 = $21,375 • capped? • $1,375 x 20 = $27,500 no • PML = $32,500 no

  13. TriState MegaCat Qualifying Losses • $20B industry hurricane • $18M TMC losses • ($18,000 - $5,500) = $12,500 from reserve • $21,375 - $12,500 = $8,875 remaining

  14. Topics • Calculation of reserves • Annual statement changes • Issues

  15. Annual Statement changes Must show: • Balance at beginning of year • Annual accumulation • Drawdowns • Qualifying Losses • Excess of Cap • 40 year rolloff • Balance at end of year

  16. Annual Statement changes • Page 3, Line 16 (Liabilities, Surplus and Other Funds) - Reserve • Statement of Income, Line 4 - Change in Reserve • Notes to Financial Statements • Statutory Issue Paper • Statement of Statutory Accounting Procedures • Actuarial Opinion to be required?

  17. Topics • Calculation of reserves • Annual statement changes • Issues

  18. Issues • Subsidization • Caps & PML • Triggers • Coordination with state funds

  19. Subsidization • Across lines • Across states

  20. Caps • 40 year roll off • needed? • PML • difficult to audit

  21. Triggers • Too high? • Too low? • Survey results

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