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Tax-Deductible Pre-Event Catastrophe Loss Reserves: The Case of Florida1

Published online by Cambridge University Press:  17 April 2015

Andreas Milidonis  and
Martin F. Grace
Andreas Milidonis
Affiliation:
Manchester Accounting and Finance Division, Manchester Business School, University of Manchester, Crawford House, Booth Street East, Manchester, M13 9PL, U.K., Tel.: +44(0)161-275-3936; E-Mail: Andreas.Milidonis@mbs.ac.uk
Martin F. Grace
Affiliation:
Department of Risk Management & Insurance, Georgia State University
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Abstract

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After Hurricane Andrew the U.S. Congress entertained proposals to allow insurers to employ tax-deferred loss reserves. Interest was strong at first, but as the events receded interest waned. However, after the most recent severe hurricane seasons the proposals are again being discussed. In this paper we examine the institution of catastrophe loss reserves in a stylized model of insurance provisions. First, we find that the benefits of the tax-deferred loss reserves depend on the actuarial assumptions regarding the expected loss distribution. Second, we make the first attempt at estimating the change in consumer behavior and the social welfare implications for permitting tax deferred loss reserves. In sum, we find under specific circumstances there are large welfare gains for allowing the tax deferral of reserves.

Keywords

Tax-Deferred Loss ReserveCatastrophe Financing and PricingExtreme Value TheoryMixture modelInsuranceReinsurance
Type
Articles
Information
ASTIN Bulletin: The Journal of the IAA , Volume 38 , Issue 1 , May 2008 , pp. 13 - 51
Copyright
Copyright © ASTIN Bulletin 2008

Footnotes

1

We would like to thank Sam Cox for suggestions on actuarial methodology. We would also like to thank Richard Derrig, Richard Phillips and Tyler Leverty for comments and assistance on an earlier version of the paper and further acknowledge the prompt and valuable help of Mr. Edward N. Trevelyan of the U.S. Census Bureau. Finally, we would like to thank an anonymous referee for his/her insightful comments. All errors or omissions, however, are the authors’ responsibility.

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