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

After Hurricane Andrew the U.S. Congress entertained proposals to allow insurers to employtax-deferred loss reserves. Interest was strong at first, but as the events receded interestwaned. After the most recent hurricane seasons, interest in the proposals has rejuvenated. Weexamine 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 ofcatastrophe reserves, we discover large social welfare gains are possible under certaincircumstances. The benefits, however, depend on the actuarial assumptions underlying theexpected loss distribution....