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

66 Pages Posted: 24 Mar 2006

See all articles by Andreas Milidonis

Andreas Milidonis

University of Cyprus - Department of Accounting and Finance

Martin F. Grace

Temple University - Risk Management & Insurance & Actuarial Science

Date Written: August 21, 2007

Abstract

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. After the most recent hurricane seasons, interest in the proposals has rejuvenated. We examine the use of catastrophic loss reserves in a stylized one period model of insurance. Taking account of the potential changes in consumer behavior due to the institution of catastrophe reserves, we discover large social welfare gains are possible under certain circumstances. The benefits, however, depend on the actuarial assumptions underlying the expected loss distribution.

Keywords: Tax-Deferred Loss Reserves, Catastrophe Financing and Pricing, Extreme Value Theory, Mixture model, Insurance, Reinsurance

JEL Classification: C61, D6, G18, H25, H31, H71

Suggested Citation

Milidonis, Andreas and Grace, Martin F., Tax-Deductible Pre-Event Catastrophe Loss Reserves: The Case of Florida (August 21, 2007). Available at SSRN: https://ssrn.com/abstract=893154 or http://dx.doi.org/10.2139/ssrn.893154

Andreas Milidonis (Contact Author)

University of Cyprus - Department of Accounting and Finance ( email )

P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 22 893 626 (Phone)

HOME PAGE: http://www.ucy.ac.cy/~amilidon/

Martin F. Grace

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1301 Cecil B. Moore Ave.
Philadelphia, PA 19122
United States

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