New York Insurance Superintendent Eric Dinallo has come out with a bold proposal to alleviate the boom-and-bust cycle insurers and consumers must endure on catastrophe-related coverage, suggesting a regulation requiring property writers to put aside part of their premiums for a special reserve fund to help pay natural disaster claims. But even bolder is his call for carriers to go along with his plan regardless of the immediate tax implications.
Convincing Uncle Sam to alter tax treatment of cat reserves will be a very hard sell, given the red ink the federal government is already spilling every year. But Mr. Dinallo said the state's deteriorating coastal property insurance market cannot wait for Congress to do the right thing, urging insurers to remember that action speaks louder than words.
“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.”
Allowing catastrophe reserve funds is a terrific idea, and long overdue. But the reason such trial balloons keep getting shot down is the financial hit the government might take if taxes are deferred in funding such a facility, and the loss the industry would have to swallow if no deferment is in the cards.
With premiums soaring for homeowners in Long Island and other coastal areas of the state, and with major carriers dumping policyholders to lower their cat exposures as quickly as state law allows, Mr. Dinallo is eager to do something to at least stabilize the market.
However, he made it clear he is not trying to bully the industry into doing anything rash, to their long-term detriment. In fact, he sounded quite conciliatory and philosophical--as long as everyone understands that the status quo is not an option.
“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,” he said. “A decision to do nothing would be a bad decision. The current system doesn’t work for companies or consumers.”
Insurers and their trade associations are genuinely intrigued, but clearly conflicted. It sounds simple to just set up a reserve fund and pay whatever tax consequences result--if it's not your money at stake, that is. But I trust that Mr. Dinallo is acting in good faith, and won't give insurers the bum's rush if they ultimately decide this isn't the right course to follow.
However, should carriers decline to move forward on Mr. Dinallo's plan, they had better come up with something just as bold to move the market in the right direction. "Just Say No" cannot be the industry's catch phrase.
What do you folks think? Could Mr. Dinallo's plan work, even without Washington's cooperation? If you don't think so, is there a better alternative?
Mr. Dinallo made his case in an Oct. 8 op-ed article in Newsday. Click here to read it. Also, click here for NU's news coverage of his announcement, and here for further industry reaction. And for coverage of a hearing on the issue this week, click here.
Comments (2)
I like the idea. Tax problems could be worked out, but as long as the funds are a corporate asset, then leaving the market could at some future time be a giant benifit to a company, leaving the rest holding the bag.
Didn't most companies leave Massachusetts high and dry over auto rates?
Some penalty would have to be worked out if ever a major player decided to leave New York.
Posted by Joe Sanders | October 11, 2007 3:09 PM
Posted on October 11, 2007 15:09
This is a great idea, but needs a couple of additions.
First, the money should go into an account that is not available to the insurer without state sign-off (and never available to the state for any reason).
Second, the reserve must be available for use in other states if the other state recriprocates if it has a reserve and, for a period of time, even if there is no reserve plan since today all surplus is available everywhere.
The point of a time limit would be to get other states to set up these reserves. Once most of the 18 hurricane-prone coastal states had reserves, it would be relatively easy, I believe, to qualify for tax-exempt status from the feds, even without legislation, by meeting the standards that the California Earthquake Authority and Florida Citizens meet to qualify (i.e., such requirements as some state control of dispersal of the funds and catastrophic, low-frequency, high-severity cover).
Posted by Bob Hunter | October 12, 2007 8:07 AM
Posted on October 12, 2007 08:07