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Tax Deductible, Pre-Event Catastrophe Reserves
Kay ClearyCasualty Loss Reserve SeminarSeptember 13, 1999
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Topics
Calculation of reserves Annual statement changes Issues
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Calculation of Reserves
Annual accumulation Caps Paying losses
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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
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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
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Qualifying losses
Losses “Direct” Loss Adjustment Expenses Assessments, surcharges and other liabilities
attributable to a qualifying catastrophe Net of reinsurance
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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
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Example: TriState Megacat
Business in CA, FL, IL Multiline company 1998 year end surplus of $100M Reserve in effect 15 years
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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
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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
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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
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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
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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
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Topics
Calculation of reserves
Annual statement changes Issues
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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
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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?
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Topics
Calculation of reserves Annual statement changes
Issues
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Issues
Subsidization Caps & PML Triggers Coordination with state funds
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Subsidization
Across lines Across states
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Caps
40 year roll off needed?
PML difficult to audit
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Triggers
Too high? Too low? Survey results
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