New York State Proposes Mandatory Catastrophe Reserve Regulation for Property/Casualty Insurers
May 27, 2009
By Richard J. Fidei, Esq., Partner and Susan W. Verini, Esq., Associate
Colodny Fass
The New York State Insurance Department (the “Department”) recently published proposed Regulation 189 (11 NYCRR 111) (the “Regulation”). The Regulation, if adopted, would require every authorized property and casualty insurer issuing a policy of insurance or contract of reinsurance covering losses resulting from a natural catastrophe in New York to establish reserve funds for payment of future losses associated with a natural catastrophe.
The Regulation’s statement of purpose includes an explanation that premium currently paid for property and casualty insurance includes a charge for possible catastrophes. When no catastrophe occurs, this charge results in underwriting gains for the insurer, which it can distribute to its shareholders. Instead allowing for that distribution, the Regulation would require that a portion of such funds be reserved to protect policyholders against future catastrophic events.
The Regulation defines “catastrophe” as follows:
“a natural event designated as a catastrophe by the Property Claims Service, a division of the Insurance Services Office, Inc., and:
(1) which causes $250 million or more in industry-wide insured losses in the United States and results in a qualifying loss to property located in New York State, or
(2) which causes $25 million or more in direct insured losses results in a qualifying loss to property located in New York State and results in a 10% reduction in the insurer’s surplus to policyholders in any calendar year.”
Qualifying losses mean: “loss adjustment expenses incurred, net of reinsurance, resulting from loss to property located in [New York] State and which are directly attributable to a catastrophe in [the] State.”
The Regulation requires property and casualty insurers to annually fund their mandatory catastrophe reserve in an amount equal to the aggregate catastrophe load included in their New York premium for a calendar year. The Regulation defines aggregate catastrophe load as “the total dollar amount of all catastrophe loads, net of non-hurricane catastrophe provisions and excess of loss reinsurance ceded, charged to all rating territories.” Insurers would not be required to fund the mandatory catastrophe reserve with respect to assumed premiums on excess of loss reinsurance contracts.
The funding of the reserves would be net of any federal, state and local income tax incurred on the reserve, and any investment income earned from the funds held in reserve.
Upon the occurrence of a qualifying loss to property located in New York, the insurer would have the right to convert all, or a portion of its New York mandatory catastrophic reserve, to an event-specific catastrophic loss reserve.
The Regulation provides that, at the end of the 30th year, and to the extent not used to fund qualifying losses, the first year’s annual contribution (including investment income) would be converted into income, and the 30th year’s annual contribution would be added to the reserve. This reserve conversion would continue each subsequent year.
The Regulation gives the New York Superintendent of Insurance authorization to release funds from the mandatory catastrophe reserve under certain circumstances, such as (i) in order to mitigate potential impairment of a property and casualty insurer; (ii) when a property and casualty insurer no longer has exposure to losses from a catastrophe; or (iii) when the release of funds would be in the best interest of New York policyholders.
Additionally, the Superintendent may release reserve funds in order to comply with a reciprocal agreement with another state that has established substantially similar catastrophe reserve requirements.
The Department has expressed support for a catastrophe reserve on a nationwide basis. Likewise, the National Association of Insurance Commissioners (the “NAIC”) has been actively examining methods of insuring against natural disasters. The NAIC’s Property/Casualty Committee has developed a possible model system utilizing tax deferred catastrophic reserves. However, implementation of the model system would require changes to the Federal Tax Code. Although there have been prior attempts to change the U.S.Tax Code, none have been successful thus far.
The most current attempt to change the Tax Code is H.R. 998, the Policyholder Disaster Protection Act of 2009. The Bill was introduced in the House of Representatives on February 11, 2009 by Thomas Rooney (R. Fla.) and referred to the Committee on Ways and Means. H.R 998 proposes revising the tax laws applicable to property and casualty insurers to permit the accumulation of pretax dollars in separate reserve funds devoted solely to the payment of catastrophic claims. As of the writing of this article, the Bill remains in the Committee on Ways and Means.
The New York Regulation presents a possible alternative to a change in the Federal Tax Code.
To view additional information regarding Regulation 189, click here.
Should you have any questions or comments, please contact Colodny Fass.
Tax-deferred catastrophic reserving is common in many other countries. See Natural Catastrophe Insurance Plan- Draft Version 13, National Association of Insurance Commissioners (2008).