Enacts the "New York state catastrophe fund authority act"; appropriates $10,000,000 therefor

The States should not wait for the Federal Government to establish a coherent and rapid response to catastrophic events. One of the purposes of this bill is to establish a state-based financing mechanism to respond to catastrophic events. Establishing a vehicle such as a Catastrophe Fund that individual states can quickly join, at their own initiative, would address the need of certain states to rapidly create a financing system so that money would be available to quickly respond to a natural disaster. The success of any Cat. Fund is based on the need to spread risk over a wide and diverse geographical area. Establishing a Cat. Fund that addresses the insurance needs of a multitude of states should encourage more states to join such a Fund, and thereby increase its ability to serve the risk management needs of each individual state.

This bill will be submitted to the National Conference of Insurance Legislators and the National Association of Insurance Commissioners for discussion, comment and review. It is the sponsors' hope that this legislation can be used as a vehicle to develop a multi-state Catastrophe Fund that satisfies the needs of States that wish to prepare disaster mitigation plans BEFORE the catastrophic event hits and facilitate the financing of rebuilding activities AFTER the event occurs to reduce the time needed to rebuild devastated communities.

Summary of provisions

Section 1 & 2: Short title and Legislative findings.

Section 3: Adds Article 92 to the Insurance Law to establish the New York State Catastrophe Fund Authority. The article sets out how the Fund is to be established, financed, and administered. Further, it lays out the standards the Authority should use in formulating and approving reimbursement contracts and the methodology for setting reimbursement premium rates. The article details how the Authority will operate and ensure that all monies transferred to the Fund will be exempt from Federal & state taxes and insulated so that New York

State or any other participating jurisdiction will not be able to raid the fund to support unrelated budgetary items.

This bill is modeled after the already existing Florida Hurricane Catastrophe Fund with some significant differences. The differences are outlined below:

Most importantly, the New York Fund would be managed by a public authority so that the fund could not be raided or money shifted from the Fund to the New York State General Fund to be used for other general public uses. The thrust of the Fund is to have a readily accessible source of cash to rebuild communities after a natural disaster strikes. A Cat. Fund, whose only asset is dry appropriation notes guaranteed by the State of New York, would be of no use should a storm hit New York's coastal areas.

Section 9201(d) expands the definition of "covered event" in several ways. First, the NY Cat. Fund Authority expands the number of covered perils and lines of business that are included when compared to the Florida Hurricane Catastrophe Fund. The Florida Hurricane Cat. Fund covers residential properties, while the New York Fund would cover both residential and commercial properties. Second, it expands the number of covered events that are included when compared to the Florida Hurricane Catastrophe Fund. The Florida Fund covers hurricane damage (i.e. wind damage), while the New York Fund would include, wind borne damage (including wind-borne water damage), ice storm damage, earthquakes, and other catastrophic events caused by nature or acts of God. The reason earthquake perils are covered is so that if, at some point, it is advantageous to merge with the California Earthquake Authority, the New York Authority will be able to do so.

Section 9201(k) has approximately the same loss threshold contained in the Florida Hurricane Cat. Fund ($4.5 Billion in 2005 and $ 5.3 Billion in 2006) before payments can be transferred from the NY Cat. Authority to primary insurance carriers for covered losses ($6 Billion). The New York threshold of $ 6 Billion would increase each year at the same percentage as the growth rate in premiums for covered policies. State sponsored Cat. Funds should cover only truly catastrophic events so that the international reinsurance market can accumulate private capital to cover insurer losses that are under a $6 Billion threshold level or above $ 15 Billion level for each covered event.

In addition, the New York Cat. Authority caps its liability to pay for catastrophic damage at $15 Billion per covered event. This is the same approximate level as is contained in the Florida Hurricane Cat. Fund.

In addition, Section 9201(k), unlike the Florida Hurricane Cat. Fund, the New York Authority does not set out definitive coverage levels at 90 percent, 75 percent, or 45 percent. It permits the Authority to establish loss coverage level bands of between 90 - 80 percent (first coverage level), 80 - 70 percent (second coverage level), and 60 - 50 percent (third coverage level). Creating these coverage level bands instead of fixed percentages will facilitate the ability of the Authority to craft their contracts with primary insurers so that coverage levels will be set at levels that best suit the needs of each individual domestic insurer.

Section 9202-b expands the general powers of the New York Authority so that it includes all of the general powers of the existing Florida Fund that covers Florida perils to also include the ability to invest in prudent catastrophe notes, bonds, options, swaps and risk futures or other prudent financial instruments to maximize the financial capacity of the fund. It is important to maximize the financial capacity of the fund so that it is able to cover catastrophic covered events that occur in New York. Section 9203(b) includes provisions so that New York domestic insurers can select from a wider array of catastrophic coverage levels to better suit their individual businesses and book of business.

Like the Florida Hurricane Fund, the New York Authority, if it has no money available to pay claims after a catastrophic event has hit, can assess a fee on all property/casualty insurers in the state of no more than 2 percent of the gross direct written premium in the entire state. Section 9205 (c) is different from the Florida Cat. Fund in that the Authority can also assess, in lieu of a state-wide fee, a fee of 2 percent or less based on a smaller geographical region than the entire state that has been hit by a catastrophic event. Upon a declared emergency by the Governor, an assessment of up to 4 percent can be levied, but under no circumstances can an annual assessment of 10 percent or more be levied even if there are 3 or more covered events in one year.

Section 9206(c) authorizes the Authority to develop new financing mechanisms to maximize the capacity of the Fund. The Authority should work specifically with national and international reinsurers to develop financial instruments so that reinsurers, insurers, and banks can place capital with the fund and receive commensurate federal and state income and franchise tax deductions, credits or deferrals.

Section 9206(c) also authorizes various public and private organizations and businesses to work together to develop new ways to mitigate catastrophic losses from a natural event before, during and after the event. Further, it puts particular emphasis on increasing the speed of recovery of local social, economic and political institutions, businesses, and infrastructure after a covered catastrophic event has occurred.

Section 9209 specifically mandates the New York Cat. Fund Authority to work with other existing Catastrophe Funds to merge operations and/or jointly or in a cooperative manner, provide insurance coverages or set premium rates. This can be done by facilitating the expansion of the New York Fund to include catastrophic coverages incurred in other states (if adequate premiums are paid to the New York Fund) or merging with other already existing federal, regional or state Cat. Funds.

Section 4: Appropriates $10 million to the Authority.

Existing law

None.

Justification

The national and New York residential and commercial property insurance market has become tighter due to the massive losses sustained by property/casualty insurers due to recent hurricanes, floods and other natural disasters across the country. To promote economic growth and to ensure that there is a mechanism in place to rapidly pay claims and rebuild communities if a catastrophic event occurs, this bill establishes a catastrophic fund authority as a back stop financial entity to ensure that insurers have the financial ability to pay claims and continue business operations after the covered event.

The catastrophic losses sustained in hurricanes Andrew, Katrina, Rita, and Wilma, earthquakes in California and the ice storms in New York highlight the need to establish either reinsurance safeguards, a catastrophe fund, or some other risk sharing mechanism so that there will be sufficient financial resources to recover and rebuild after a catastrophic event has occurred. This bill suggests a mechanism by which insurers can obtain additional and affordable reinsurance protection from significant natural disasters. This could help property/casualty insurers to remain solvent should a catastrophe hit, pay claims on a timely basis, and very importantly, allow carriers to CONTINUE TO write more residential and commercial insurance to protect local homes and businesses with minimal increases in premiums AFTER a catastrophic event occurs.

One goal of introducing this bill is to develop, on a consensus manner, a financing mechanism so that should a natural disaster hit, policy holders will be able to quickly receive cash payments from their insurers to facilitate home reconstruction. The fund is to be managed by a public authority so that it can receive both state and federal tax exempt status to allow capital to build up more quickly and discourage the State from raiding such a fund.

Since Washington has been reluctant to begin to plan for future mega natural disasters and has relied instead on an Ad Hoc basis to respond to such events and finance recovery efforts, the States must join forces to develop their own mechanism to mitigate against the loss of life and property damage caused by future natural disasters and facilitate reconstruction after the event.

This bill will be submitted to the National Conference of Insurance Legislators and the National Association of Insurance Commissioners to add to the ongoing discussions that are occurring to develop and implement either a multi-state or national catastrophe fund or some other risk sharing mechanism to finance reconstruction of communities after a natural disaster has occurred.

Legislative history

Same as S.6673/A.9885 of 2005/2006. Portions of this bill were derived from Senate Bill 2826 (Velella) of 1997. S.1883 of 2007/2008

Fiscal implications

$10 million.

Local fiscal implications

None.

Effective date

Immediate.