Posted on 10 Apr 2009
The New York State Insurance Department recently proposed a rule that would require insurers to set up a reserve fund to cover losses that occur in the state related to a natural catastrophe.
This proposal requires authorized property/casualty insurers to establish reserve funds for the payment of losses that occur in New York, arising out of natural catastrophes. Insureds currently pay for catastrophe coverage every year as part of their property insurance premiums, yet catastrophic events generally happen infrequently. This results in higher underwriting gains for insurers for years in which no catastrophe occurs.
The portion of these underwriting gains generated from premiums being charged to insureds for catastrophe coverage should be retained by insurers in the event of future catastrophe losses, and not be distributed to shareholders or otherwise re-collected from policy holders through the premium on an annual basis.
This reserve will have a stabilizing effect on insureds' premiums over time, and will facilitate the ability of insurers to fund catastrophic losses and mitigate the exposure of insurers' surplus to policyholders to large fluctuations resulting from such losses.