Natural catastrophes and terrorist attacks can place enormous financial demands on the insurance industry, resulting in higher premiums and substantially reduced coverage. Although insurers suffered losses of more than $20 billion in Florida from the 2004 hurricanes, steps such as implementing stronger building codes and stricter underwriting standards limited market disruptions.
Some insurers and reinsurers benefited from catastrophe bonds, which provided a diversified funding base. However, these bonds currently occupy a small niche in the global catastrophe reinsurance market, and many insurers view the costs associated with their issue as excessive. In addition, the industry does not consider such bonds feasible for terrorism risk. Authorizing insurers to establish tax-deductible reserves for potential catastrophic events has been advanced as a means to enhance industry capacity, but some industry analysts feel that such reserves would lower federal tax receipts and not necessarily bring about a meaningful increase in capacity.
The Government Accountability Office studied six European countries that use a variety of approaches to address catastrophe risk. Some governments require insurers to provide natural catastrophe insurance and provide financial assistance to insurers in the wake of catastrophic events, while others rely on the private market. Although their approaches vary, insurers in all six countries were allowed to establish tax-deductible reserves for potential catastrophic events as of 2004. Drafts of the report were forwarded to the Department of the Treasury and the National Association of Insurance Commissioners.
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