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Draft Bill Would Allow Insurers to Create Tax-Deferred Catastrophe Reserves

Source: A.M. Best

Posted on 04 Dec 2012 by Neilson

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NAIC Draft Bill on Cat ReservesDraft federal legislation allowing private insurers to create a tax-deferred reserve to prepare for catastrophes under a national program to be administered by the Federal Insurance Office is under review by state insurance regulators.

The draft is being circulated by Washington, D.C., city officials, who sought comment from members of the National Association of Insurance Commissioners Property and Casualty Insurance Committee at the NAIC's fall meeting.

Thomas Glassic, general counsel in D.C.s Department of Insurance, Securities and Banking, said U.S. Rep. Eleanor Holmes Norton, D-District of Columbia, has tried twice previously to move similar versions of the bill and is looking to reintroduce a new version. The bill would specify that insurers looking to establish these tax-deferred catastrophe reserve funds must have an office domiciled in the District.

Insurers have historically been reluctant to set up such funds, Glassic said, because the existing tax code only lets companies set reserves aside to pay claims that happened within a certain time period, not to save for future catastrophes. However, private companies can go to the United Kingdom, Germany, Switzerland and Bermuda if they want to set aside part of their premiums to accumulate tax-deferred catastrophe reserves.

Glassic said domiciling in D.C. could give companies an advantage, because the District is unable to tax such funds unlike states. He said the tax-deferred reserve funds would be capped industrywide as in other countries.

One area of contention is likely to be the use of the FIO to run the program. Glassic sees the FIO as an administrator and said the agency was given that role in the draft in part to address earlier NAIC calls for such an office. But NAIC President-elect Jim Donelon sees FIO as having regulatory power and called its role a non-starter. Donelon suggested the language be removed. Take it out, he said. We can regulate it. Donelon said some in the insurance industry support the concept of tax-deferred catastrophe reserve funds, but reinsurers are likely to view the legislation as putting the government in competition with them.

Dennis Burke, vice president at the Reinsurance Association of America, said such a plan might serve as a disincentive for companies to diversify risk and that a fear has been that Congress may end up making companies pay for the program. Burke said he was skeptical of the notion that states would somehow allow companies to set up domiciled offices for catastrophic funds in the District only without taking action.

The earlier versions of the bill were removed from prior reauthorizations of the Terrorism Risk Insurance Act. Glassic said the new draft could complement TRIA, which is up for reauthorization again before December 2014 and figures to be an item of great interest to the industry in 2013.

The draft bill describes covered events as windstorms, earthquakes, winter catastrophe, fire, tsunami, flood, volcanic eruption, hail and acts of terrorism. Lines of business that would qualify under the bill include fire, allied, farmowners' multiperil, homeowners' multiperil, commercial multiperil, earthquake and inland marine.

In 2006, former D.C. Insurance Commissioner Lawrence Mirel told Best's News Service that tax-deferred reserves would improve the industry's capacity and bring more tax revenue into the United States.