tax deductible, pre-event catastrophe reserves

Tax Deductible, Pre-Event Catastrophe Reserves

Kay ClearyCasualty Loss Reserve SeminarSeptember 13, 1999

Topics

Calculation of reserves Annual statement changes Issues

Calculation of Reserves

Annual accumulation Caps Paying losses

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

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

Qualifying losses

Losses “Direct” Loss Adjustment Expenses Assessments, surcharges and other liabilities

attributable to a qualifying catastrophe Net of reinsurance

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

Example: TriState Megacat

Business in CA, FL, IL Multiline company 1998 year end surplus of $100M Reserve in effect 15 years

TriState MegaCat California

LINE PREM FACTOR RESERVE

Homeowners 31,680 1.0% 317

CMP – nonliab 0 2.0% 0

CMP – liab 0 0.0% 0

Med mal 0 0.0% 0

EQ 428 20.0% 86

PPA – liab 40,449 0.0% 0

PPA – nonliab 34,345 0.5% 172

TriState MegaCat Florida

LINE PREM FACTOR RESERVE

Homeowners 3,305 10.0% 331

CMP – nonliab 0 12.5% 0

CMP – liab 0 0.0% 0

Med mal 0 0.0% 0

EQ 136 1.5% 2

PPA – liab 6,475 0.0% 0

PPA – nonliab 5,342 1.0% 53

TriState MegaCat Illinois

LINE PREM FACTOR RESERVE

Homeowners 27,909 1.5% 419

CMP – nonliab 0 2.5% 0

CMP – liab 0 0.0% 0

Med mal 0 0.0% 0

EQ 33 8.0% 3

PPA – liab 39,500 0.0% 0

PPA – nonliab 20,398 0.5% 102

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

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

Topics

Calculation of reserves

Annual statement changes Issues

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

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?

Topics

Calculation of reserves Annual statement changes

Issues

Issues

Subsidization Caps & PML Triggers Coordination with state funds

Subsidization

Across lines Across states

Caps

40 year roll off needed?

PML difficult to audit

Triggers

Too high? Too low? Survey results