Posted On: October 9, 2007, 7:15 am CDT

Posted By: an actuary

Insurance companies already have massive rainy day funds. We call it reinsurance. Because of differential tax treatment and risk appetite primary insurers often prefer to pay for access to that capital through reinsurance premium rather than accumulate it themselves.

As written the regulations will make hurricane insurance more expensive and less available. The contributions to the funds require all cat-related premium net of taxes and reinsurance to be put into the fund for 20 years. From an insurance company perspective, why would they do this? They get to take all the risk and have to delay reward for 20 years. They can get better risk-adjusted returns elsewhere. On top of that, this cat reserve is subject to premium tax and annual income taxes for 20 years. It's a no-brainer. Smart companies will pass on coastal exposure.