NAIC Catastrophe Reserve Working Group Convenes First Meeting

On Wednesday, May 14, 2008, the National Association of Insurance Commissioners (“NAIC”) held the inaugural meeting of the 2008 Catastrophe Reserve (C) Working Group (“Group”).

The meeting was called to order by Eric Nordman, NAIC Director of Research. Regulators from Connecticut, Florida, New York, Ohio, Texas and Tennessee were in attendance.

The current NAIC National Catastrophe Reserve Fund proposal recognizes that IRS tax laws do not allow favorable tax treatment for insurance company loss reserves. This issue is, however, addressed by some international jurisdictions, which allow for a tax-deferred catastrophe reserve fund. Those ideas may be adapted for the United States if deemed necessary and feasible.

Extensive work already has been completed on the current proposal, definitions of all relevant terms have been addressed, and a 20-year rolling cap has been set for funds. If, after 20 years, a company’s catastrophe reserve funds have not been used, they are to be absorbed back into the company and listed on its income statement

As a result of the Group’s 2007 feasibility exploration meetings, it was decided to delay submission of the proposal to the full NAIC until the Federal tax issue is addressed, and the IRS tax code is changed. It was the general consensus of the 2007 Group that the catastrophe reserve fund has to be created on a national, rather than state level.

The New York regulators requested re-formation of the Group at the NAIC Summer 2008 Meeting to re-visit the issue of a National Catastrophe Reserve Fund.

An actuary from the Massachusetts Division of Insurance expressed concern that funding of a national catastrophe reserve could have a possible impact on rates, and that if usage of the money put into the reserve fund is highly restricted and cannot be used if needed, that rate loads could be impacted. This issue was acknowledged and will be explored by the Group if they re-convene.

A proposal was made by the regulator from New York that a 45-day comment period should be opened to determine whether the Group and the NAIC should re-visit the National Catastrophe Reserve Fund issue, and if the NAIC’s position should be tied to that of the Federal tax issue.

The proposal to open the matter up for comment was accepted, and a statement will be posted on the NAIC Web site by Friday, May 15, 2008, along with the current National Catastrophe Reserve Fund proposal.

The meeting was then adjourned.

To read an NAIC White Paper entitled “Natural Catastrophe Risk: Creating A Comprehensive National Plan,” click here.

To read a summary of the March 29, 2008 Catastrophe Insurance Working Group meeting, click here.

 
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