Political controversy surged out of the devastating tornado that struck Moore, Oklahoma, as the state's U.S. Senators, Jim Inhofe and Tom Coburn were accused of favoring aid for their state after impeding aid for victims of Hurricane Sandy. Whatever the merit of the charges, the controversy may lead to needed reform, suggests Howard Mills, chief advisor with Deloitte LLP's insurance industry group.
Politicians in other parts of the country have said that the nation needs to be prepared for natural catastrophes of greater frequency, severity and loss of both property and life, Mills notes. The question is where to find the capital to deal with such emergencies.
In the case of the Moore, Oklahoma, tornado, a debate has begun about how to fund fitting all of the state's schools with adequate tornado shelters. Seven children were killed at Moore's Plaza Towers Elementary School, which was one of several schools who lost out in a state funding "lottery" to pay for shelter. That's just one example of many potential fiscal challenges rising out of catastrophes that could be met in some measure by regulation permitting insurers to build up catastrophe reserves, suggests Mills. "Currently insurers are not allowed to set aside catastrophe reserves over a period of years," he notes.
If insurers were permitted to put aside funds with favorable tax treatment, it would not take long to build up significant reserves that would be available in the event of a catastrophe. "In that case, every dollar built up is a dollar that won't be spent in a federal bailout," Mills comments.
Catastrophe reserving would also address the political dynamic associated with parts of the country unaffected by natural catastrophe risk having to subsidize those that are, Mills adds.
The National Association of Insurance Commissioners (NAIC) has worked since the mid-1990s to bring about pre-event, tax-deferred catastrophe reserving. Current law does not allow for deduction of losses that have not yet been incurred. The New York State Insurance Department (NYSID) has proposed regulation to establish mandatory catastrophe reserve funds. The regulator emphasizes the policyholder interest in this linked 2009 client memorandum by law firm Willkie Farr & Gallagher:
The NYSID recognizes that whereas current property insurance premiums generally include amounts for catastrophe coverage, catastrophic events tend to arise as a very small number of very costly events spread out over many years. Such inclusion of catastrophe charges results in higher underwriting gains for insurers in years in which no catastrophes occur. The Proposed Regulation thus requires insurers to retain such gains as a reserve for future catastrophe losses. The mandatory catastrophe reserve that would be established under the Proposed Regulation is intended to (a) create a stabilizing effect on policyholders’ premiums over time and (b) facilitate the insurers’ ability to fund catastrophic losses (while mitigating the large fluctuations in the insurers’ policyholder surplus that can result from such catastrophic losses).
Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio