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

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. The authors 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, they discover large social welfare gains are possible under certain circumstances. The benefits, however, depend on the actuarial assumptions underlying the expected loss distribution.