N.Y. Considers Requiring Cat Reserves

Insurers and trade groups are far from unanimous in reacting to a proposed regulation by New York Insurance Superintendent Eric Dinallo that would require property writers to direct part of their premiums into a catastrophe reserve fund to help pay for natural disaster claims, regardless of current tax considerations.

The concept has some offering support, some opposition, and some on the fence.

“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,” said Mr. Dinallo, who lobbied for his proposal in an Oct. 8 op-ed column in Newsday. “In fact, because of current insurance accounting and tax rules, if there is no hurricane, the extra money goes to insurance companies' profits.”

The proposed reserve fund 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 proposed regulation would start the formal review process, including publication in the New York State Register and a formal 45-day period for written comments.

Bernard Bourdeau, president of the New York Insurance Association, said his group has “always been in favor of allowing companies to do the reserving rather than have one big catastrophe fund.”

However, “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.”

Mr. Bourdeau said if federal authorities would allow tax-deferred hurricane reserves, the problems of coastal insurance availability in the state “would go away,” but “the feds view the budget hit to be too large.” He said he would oppose any regulation that might make New York “one state against 49″ and “make deployment of capital here less attractive.”

Mr. Dinallo said changing tax policy may be difficult, and suggested the industry should act responsibly by reserving regardless of the immediate tax implications.

“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,” he said. “Meanwhile, we need to start building protection against the potentially huge costs of hurricanes now.”

It's clear the tax issue will be a major sticking point. “An insurer's ability to set up a tax-deferred catastrophe reserve is a critical component,” said Joe Annotti, vice president of public affairs at the Property Casualty Insurers Association of America.

Mr. Dinallo, he added, “is on the right track, but unless there is a tax incentive to do that, I don't know how realistic and effective this proposal is.” He suggested insurers might “embrace such a regulation, or it may make them further restrict their property insurance capacity in the state.”

A State Farm representative, Fraser Engerman, said the insurer is “not sure how workable this is going to be. We need more details to have a discussion…It's a new concept. We will examine it.”

Allstate, which has been cutting back on property exposures in New York coastal areas, did not comment directly on the proposed regulation but said it agrees with the superintendent that “a decision to do nothing is a bad decision.” Allstate is a major backer of ProtectingAmerica.org, a group which in part advocates preparing for disasters by establishing special catastrophe backstops at the state and national level.

A Travelers representative, Jennifer Wislocki, said the carrier supports the superintendent's proposals for three reasons. “Primarily, it provides increased transparency to consumers, regulators can better assess insurance company solvency, and it might contribute to less volatility in wind premiums over time,” she explained.

Ms. Wislocki added that she was “emphasizing the word 'might.' We see this as a good first step, but there are many issues that need to be addressed in order to solve the problem of availability and affordability of coastal insurance.”

She noted that Jay S. Fishman, Travelers' chairman and CEO, has proposed a federally regulated U.S. coastal hurricane zone where the government would oversee most aspects of wind underwriting by private insurers–including pricing.

Paul Tetrault, Northeast state affairs manager at the National Association of Mutual Insurance Companies, said in e-mailed remarks that Mr. Dinallo's concept was novel and might be a vehicle for discussion. However, he added, “the superintendent's comments do not acknowledge the existence of policyholder surplus, which is available for contingencies such as catastrophes even if it is not designated for that purpose prior to an event.”

The New York department's proposal, he said, “appears to be aimed at achieving, or at least taking a step toward tax-free buildup of catastrophe reserves–an idea that is often cited as desirable from a public-policy perspective but perhaps not viable politically.”

Robert P. Hartwig, president of the Insurance Information Institute, said he thought many insurers would agree that the notion of having reserves to create less volatility in coverage availability and price is “a laudable goal.”

“What we will see here is some insurers will believe what Mr. Dinallo has proposed is acceptable, and others will believe the tax consequences deserve more study, and others that there is a need for a more comprehensive plan with state funds and a federal cat mechanism associated with it,” he said. “It does appear there are some that believe we could move to present reserving without an accelerated tax credit.”

Some insurers, according to Mr. Hartwig, will be able to look past the tax issue and concentrate on a solution, while others will not. In all likelihood, he said, the regulation, if ever enacted, could be the subject of a court challenge.

“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.”