N.Y.’s Dinallo proposes ‘rainy day’ fund

Insurance companies providing homeowners, business and other property insurance in New York State would be required to create a catastrophe reserve fund to help pay claims caused by hurricanes and other natural disasters under a new regulation proposed by Insurance Superintendent Eric Dinallo.

Dinallo said he thinks a private solution to the need for catastrophe coverage is better than a public fund. His plan would require insurers to set aside a portion of premium for a catastrophe fund. He said eventually the reserves could be exempt from taxes.

“This reserve fund will help pay the claims if and when hurricanes and other disasters do hit,” Dinallo said. “Catastrophe reserves will provide increased transparency that will be good for the industry and consumers. Consumers will see where the money they pay for hurricane protection goes. They will see if it is not enough and there is a need for higher premiums. And they will see if the reserve is large and untouched and can then question the need for higher premiums.”

Insurers aren’t thrilled with Dinallo’s plan. The Property Casualty Insurers Association of America (PCI) expressed doubts about having insurers pay into a state fund now, with the promise of tax breaks in the future. PCI said it agrees that voluntary, tax-deferred, pre-event reserves to fund catastrophe risks is a good idea, but at the federal, not state, level.

“While Superintendent Eric Dinallo’s proposal attempts to address the reserve issue, without the proper tax treatment we question the real impact of such a regulation. We hope, however, that this will spur federal consideration of the tax treatment of such reserves,” the group said in a statement.

Under current accounting and tax rules, insurance 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. But if a company does not know when the event will occur, then money placed in reserve 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,” Dinallo said.