The country may not need a natural catastrophe backup fund like it has for terrorism exposures, provided government allows insurers to create catastrophe reserves on a tax-deferred basis, according to New York’ insurance regulator.
New York State Superintendent of Insurance Howard Mills told an agents’ group on Long Island that the insurance industry has the capacity to handle natural disasters, if a few conditions are met, including the use of a tax-deferred catastrophe reserve.
“This would enable the industry to set aside money [from insurance premiums] for certain specific disasters in certain specific regions so when a disaster hits, there is a dedicated pool of resources from the industry,” said Mills.
Mills said the nation’s catastrophe strategy should also include improving risk-based pricing, encouraging more personal responsibility on the part of insureds, and improving and standardizing building codes.
“I am not sold that we need a federal backstop, as we do with terrorism insurance, because the capacity is there, but we need to enable the industry to do more. We need to encourage the industry to develop its infrastructure and then the federal government has to rely upon the infrastructure that the private sector, that the insurance industry has developed,” Mills said.
Mills delivered the keynote address at the Professional Insurance Agents of New York State Inc.’s Long Island Regional Awareness Program in Great Neck to a crowd of nearly 300 attendees.
Regarding the federal Terrorism Risk Insurance Act, Mills said that he believes TRIA will not be extended beyond 2007.
“There must be a continued role of the federal government in terrorism coverage or that coverage will not be available in this country when TRIA expires at the end of 2007,” maintained Mills. “If the federal government pulls out entirely, the response will be that [insurance companies will] leave the market.”
According to Mills, insurance companies cannot handle terrorism coverage on their own because of the unpredictable nature of these events and their potential for high losses. If TRIA is not renewed at the end of 2007, Mills advocates that the U.S. insurance industry adopt a similar program to Europe’s reinsurance pooling arrangement.
Mills discussed Allstate’s departure from the Long Island homeowners market but offered no immediate solution. He noted that state law allowed Allstate to issue a certain number of non-renewal notices, and vowed that the New York State Department of Insurance would continue to monitor the situation.
“We’re of course very concerned about the availability and the affordability of homeowners insurance and keeping that market strong and viable and available to all consumers,” he said.
He stressed the need for residents to be prepared for possible bad weather ahead.
“New Yorkers, especially on Long Island, need to be aware of the fact that New York is a location that has had major hurricanes in the past, and we will certainly be the victim of a major hurricane in the future,” said Mills. “Loss mitigation is the responsibility of everyone, not just insurance companies, but the insureds as well.”