tax deductible, pre-event catastrophe reserves kay cleary casualty loss reserve seminar september...
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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
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