NEW YORK–Former New York Insurance Superintendent Howard Mills said his successor, Eric Dinallo, has a good concept in mind to remedy catastrophe insurance reserve problems, but it's unworkable.
Speaking at a rating agency conference last week, Mr. Mills, a Republican, who is chief advisor for the Insurance Industry Group of Deloitte & Touche USA, said the limited scope of catastrophe reserving plan put forth by Mr. Dinallo, a Democrat, last October would make it unfeasible in practice.
"He [was] on the right track and doing [his] best given the constrictions of this wacky state regulatory system," Mr. Mills said of Mr. Dinallo. But this "really can't work on a standalone basis," Mr. Mills said last Monday during the Standard & Poor's annual insurance conference in New York.
Mr. Mills explained that if New York requires insurers to set aside money, which would not be taxed, and they don't have to do this if they write homeowners in New Jersey, "then New York would in fact put itself at a competitive disadvantage and give Allstate and Travelers yet another reason not to do business in there," suggesting that the plan would make more sense as a national, rather than a single-state solution.
Like Mr. Dinallo, Mr. Mills proposes allowing insurers to set aside and invest "dedicated catastrophe reserves."
By allowing such reserves, "ultimately…you're looking at premium payers who will be paying" the costs of insuring homeowners in catastrophe-exposed areas, Mr. Mills said, distinguishing the solution from government backstops.
A "backstop…means taxpayers are going to pay the tab," he said. "You are going against one of the fundamental principles of insurance"–commonality of risk–he said, noting that taxpayers not living on the coast would pay for risks of those that do.
Explaining the dedicated reserve approach, he said, the industry needs "to think about insurance the way the typical insured does," explaining that a Long Island homeowners that has paid premiums to Allstate for years without a claims, thinks there's Allstate has "a bucket of money with his name on it" to draw from his accumulated premiums when the big one does strike his house. The insured doesn't understand that at the end of every year, "this capital goes elsewhere, because the tax code forces it to go elsewhere," he said.
"Why not enable the industry to invest some of that money so…actual premium dollars paid [are] invested" and funds remain dedicated for mega-catastrophes, Mr. Mills asked, stressing that appropriate controls and tax accounting laws would need to be put in place to guard against insurers moving the money around.
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