Tax Deductions for Catastrophic Risk Insurance Reserves: Explanation and Economic Analysis

摘要

The devastation caused by Hurricane Katrina which struck along the Gulf of Mexico and Atlantic coast on August 29, 2005, highlights the fact that the United States continues to be subject to natural hazard risks, primarily weather-related risks such as hurricanes and windstorms, but also seismic risk (earthquakes, tsunami, volcanic eruptions) and flood hazard risks. Such natural disaster risks result in deaths, property damage, and economic dislocation. Federal outlays for disaster victims have been increasing, and the frequency of weather-related natural disasters is generally perceived to be rising. The combination of economic dislocation from natural disasters and high federal and private costs has generated interest in Congress and elsewhere in proposals designed to change the way individuals and communities evaluate and protect themselves against the risk of natural disasters (i.e., financing risk with insurance). Given the increasing concentration of insured property values and sophisticated computer models that suggest an increased frequency of hurricanes and high probable maximum losses (PML) from catastrophic earthquakes, respectively, there has been some sense of urgency in Congress, state legislatures and the private sector to address the nation's financial exposure to catastrophic risks. One widely-discussed proposal would change the tax treatment of catastrophic risk insurance by permitting firms to establish tax- deductible reserve funds for catastrophes.