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

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  • Milidonis, Andreas
  • Grace, Martin F.

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. 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.

Suggested Citation

  • Milidonis, Andreas & Grace, Martin F., 2008. "Tax-Deductible Pre-Event Catastrophe Loss Reserves: The Case of Florida1," ASTIN Bulletin, Cambridge University Press, vol. 38(1), pages 13-51, May.
  • Handle: RePEc:cup:astinb:v:38:y:2008:i:01:p:13-51_01
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    Cited by:

    1. David Blake & Marco Morales & Enrico Biffis & Yijia Lin & Andreas Milidonis, 2017. "Special Edition: Longevity 10 – The Tenth International Longevity Risk and Capital Markets Solutions Conference," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 84(S1), pages 515-532, April.
    2. Wang, Guanying & Wang, Xingchun & Shao, Xinjian, 2022. "Exchange options for catastrophe risk management," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    3. Braun, Alexander, 2011. "Pricing catastrophe swaps: A contingent claims approach," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 520-536.
    4. Schlütter, Sebastian, 2011. "The role of frictional costs for insurance pricing and insurer default risk," ICIR Working Paper Series 07/11, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    5. Kousky, Carolyn & Cooke, Roger M., 2009. "The Unholy Trinity: Fat Tails, Tail Dependence, and Micro-Correlations," RFF Working Paper Series dp-09-36-rev.pdf, Resources for the Future.
    6. Burnecki, Krzysztof & Giuricich, Mario Nicoló & Palmowski, Zbigniew, 2019. "Valuation of contingent convertible catastrophe bonds — The case for equity conversion," Insurance: Mathematics and Economics, Elsevier, vol. 88(C), pages 238-254.

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