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Pre-Event Catastrophe Reserves An Update

This update covers the NAIC Proposal on Catastrophe Reserves, including tax deferral, voluntary contributions, and accounting treatment. It discusses the potential revisions, tax issues, liability definitions, and international accounting considerations.

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Pre-Event Catastrophe Reserves An Update

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  1. Pre-Event Catastrophe ReservesAn Update Kay Cleary September 2003 • Chicago, Illinois

  2. 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 CLRS

  3. Current applicability • Property lines only • Specified perils only CLRS

  4. NAIC Proposal • 20-year phase in • Tax-deferred contributions; taxed in year of draw down CLRS

  5. Proposed Accounting • Balance Sheet • Income Statement • Notes to Financial Statements CLRS

  6. Paying Catastrophe Claims • Qualifying events • Amount to be withdrawn CLRS

  7. Status of NAIC Proposal • No activity on federal tax change • RBC treatment • Accounting treatment CLRS

  8. Potential Revisions to NAIC Proposal • Review factors – update needed? • Terrorism • Workers' Compensation • Other, including non-P&C lines CLRS

  9. SAP Statement of Concepts • Conservatism – yes • Consistency – no • Recognition – probably OK CLRS

  10. Accounting Treatment • Definition of liability (SSAP #5, FASB Statement of Concepts #6) • Pre-Event (SSAP #55) • Matching of income and expenses CLRS

  11. Tax Issues • Fewer tax dollars from industry. • Offset elsewhere? CLRS

  12. Liability or Special Surplus? • Should be surplus? (SSAP 72) CLRS

  13. Voluntary Reserve • Consistency • SSAP 60 if mandatory CLRS

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

  15. Comments Received • Inefficient on an industry level? • Inefficient use of capital? CLRS

  16. International Accounting • Equalization reserves • Catastrophe reserves CLRS

  17. Why set up a reserve? • Mandatory • Best use of $$ for purpose • Federal income tax • Compare to other uses • Mixture of tools CLRS

  18. Summary • Federal tax revision? • Accounting? • Additional lines and perils? • Design modifications? • Significant, appropriate, & fair incentive? CLRS

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