N.Y. Proposes To Change Insurer Cat Reserving

New York's chief insurance regulator said today he is proposing a regulation requiring property insurers to direct part of the premiums they collect into a catastrophe reserve fund to help pay for natural disaster claims.

Companies providing homeowners, business and other property insurance in New York State would be affected by the plan proposed today by State Insurance Superintendent Eric Dinallo.

"Most people probably think that the extra money they pay on their homeowners insurance for hurricane protection goes into a 'very rainy day fund' to pay claims when hurricanes hit. In fact, because of current insurance accounting and tax rules, if there is no hurricane, the extra money goes to insurance companies' profits," Mr. Dinallo said.

In reaction, Bernard Bourdeau, president of the New York Insurance Association, said he had not seen the proposal draft yet, but his group has "always been in favor of allowing companies to do the reserving rather than have one big catastrophe fund."

"The biggest hurdle" for the proposal, he added, is the federal tax component, and if Mr. Dinallo's department "has a way to figure out how to overcome that, it's well on its way."

Currently, Congress is considering a bill to expand the National Flood Insurance Program to have it provide homeowners with protection against windstorm as well as flooding. The measure was the subject of a U.S. Senate committee hearing on Tuesday, where it got support from New York Sen. Charles Schumer--who, like Mr. Dinallo, is a Democrat.

Mr. Dinallo, noting "proposals to have government take over or subsidize hurricane insurance, as it does with flood insurance," said he believes "it is better to find a private-sector solution." The proposed reserve fund will help pay claims if and when hurricanes and other disasters do hit, he said.

Catastrophe reserves, he added, "will provide increased transparency that will be good for the industry and consumers."

Mr. Dinallo said insurance for catastrophes does not work the way it does for auto insurers, which can effectively set aside what they will pay for accidents in a particular year because they have predictable historical data on the number of claims every year and the cost of those claims.

"The problem for big catastrophes such as hurricanes is that there are a very small number of very costly events that are spread out over many years. So, sharing risk in one year does not work. Effectively spreading the risk of hurricane losses requires not only sharing among many people but also across several years," the superintendent said.

Mr. Dinallo expressed the opinion that current accounting and tax rules discourage insurers from setting up a reserve to fund losses from events that have not yet occurred, such as those from future hurricanes.

He explained that companies can deduct from this year's revenues money reserved for claims resulting from events that occur this year. That reduces this year's taxes. Statutory accounting considers those reserves an operating expense.

But if a company does not know when the event will occur, then money placed in reserve is not considered an expense in the current year by statutory accounting and is subject to federal and state taxes.

"I'm in favor of tax-deferred reserves for hurricanes, but the industry will only achieve that change if it acts first and gains credibility," Mr. Dinallo said. "Meanwhile, we need to start building protection against the potentially huge costs of hurricanes now."

The proposed new reserve would cover losses related to natural catastrophes such as hurricanes, wind, hail, earthquake, winter storms (snow, ice, freezing) or tsunami. The regulation would require companies to reserve the amount they now charge policyholders for catastrophe protection, less any taxes paid and the cost of reinsurance.

No date has been set for when the cat reserve regulation would start the formal proposal process, including publication in the New York State Register and a formal 45-day period for written comments.

"I believe a hurricane reserve fund is an important part of the solution, but I am happy to start a discussion with insurance companies, consumers and legislators about possible improvements to this proposed regulation and to develop other ideas," said Mr. Dinallo. "A decision to do nothing would be a bad decision. The current system doesn't work for companies or consumers."