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Pre-Event Catastrophe Reserves An Update

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

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 Paying Catastrophe Claims • Qualifying events • Amount to be withdrawn CLRS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