Tax Deductible, Pre-Event Catastrophe Reserves Kay Cleary Casualty Loss Reserve Seminar September 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

TriState MegaCat Florida

TriState MegaCat Illinois

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