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Pre-Event Catastrophe Reserves An Update. Kay Cleary September 2003 • Chicago, Illinois. 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

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pre event catastrophe reserves an update

Pre-Event Catastrophe ReservesAn Update

Kay Cleary

September 2003 • Chicago, Illinois

summary of naic proposal
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
Current applicability
  • Property lines only
  • Specified perils only

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naic proposal
NAIC Proposal
  • 20-year phase in
  • Tax-deferred contributions; taxed in year of draw down

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proposed accounting
Proposed Accounting
  • Balance Sheet
  • Income Statement
  • Notes to Financial Statements

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paying catastrophe claims
Paying Catastrophe Claims
  • Qualifying events
  • Amount to be withdrawn

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status of naic proposal
Status of NAIC Proposal
  • No activity on federal tax change
  • RBC treatment
  • Accounting treatment

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potential revisions to naic proposal
Potential Revisions to NAIC Proposal
  • Review factors – update needed?
  • Terrorism
  • Workers' Compensation
  • Other, including non-P&C lines

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sap statement of concepts
SAP Statement of Concepts
  • Conservatism – yes
  • Consistency – no
  • Recognition – probably OK

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accounting treatment
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
Tax Issues
  • Fewer tax dollars from industry.
  • Offset elsewhere?

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liability or special surplus
Liability or Special Surplus?
  • Should be surplus? (SSAP 72)

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voluntary reserve
Voluntary Reserve
  • Consistency
  • SSAP 60 if mandatory

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

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comments received
Comments Received
  • Inefficient on an industry level?
  • Inefficient use of capital?

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international accounting
International Accounting
  • Equalization reserves
  • Catastrophe reserves

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why set up a reserve
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
Summary
  • Federal tax revision?
  • Accounting?
  • Additional lines and perils?
  • Design modifications?
  • Significant, appropriate, & fair incentive?

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