Terror Premium Refunds Due: CFA

Washington

Insurance companies should refund 40 percent to 50 percent ofthe premium for terrorism insurance to businesses with existingcoverage, the Consumer Federation of America said in a report thatwas blasted by insurance groups.

“Taxpayer backup has lowered the risk and costs of commercialinsurers literally overnight,” said J. Robert Hunter, director ofinsurance for the Washington-based CFA.

Businesses with current coverage, Mr. Hunter said, should demand“immediate and sizable” refunds of terrorism insurancepremiums.

“My analysis shows that the typical business with terrorismcoverage should get back about 40 to 50 percent of its premium fora full year, or 20 to 25 percent for a half year of remainingcoverage,” he said.

Mr. Hunter said that he reached this estimate based on how muchless insurance companies would have to pay under the recentlyenacted terrorism insurance law than before its enactment in theevent of a future terrorist attack.

Before President Bush signed the bill, Mr. Hunter said,taxpayers were liable for 35 percent of all insurance losses, basedon the federal corporate write-off rate.

But under the new law, he said, insurance companies will pay 53percent less for a mid-sized terrorist attack–one with averagelosses of $25 billion–and 68 percent less for a large attack withaverage losses of $40 billion.

Adding some assumptions about the percentages of losses thatwill be paid out in each size category to his analysis (includingsmall attacks for which insurers will see no savings), Mr. Hunterconcluded that the overall cost savings to insurers and businessesis 46 percent.

Julie Gackenbach, assistant vice president of governmentrelations with the Des Plaines, Ill.-based National Association ofIndependent Insurers, criticized Mr. Hunters numbers as basedsolely on conjecture.

The problem with developing a premium and underwriting structurefor terrorism risks is that while insurance companies can develop amodel based on severity, Ms. Gackenbach said, there is no modelbased on frequency.

But Mr. Hunter seems to base his numbers on frequency despite alack of data, she said.

Ms. Gackenbach also challenged Mr. Hunters assertion thattaxpayers are already on the hook for 35 percent of losses, basedon the corporate write-off rate.

The 35 percent figure, she said, is simply the top tax rate.Where there is no income, Ms. Gackenbach said, there is no taxdue.

But this is not really as expense borne by taxpayers, she said.And in any event, insurance companies that do experiencesubstantial losses and thus have no income, may still be hit by thecorporate alternative minimum tax.

Gary Karr, a representative of the Washington-based AmericanInsurance Association, blasted the report.

“We have consistently said that CFA does not represent theconsumers of commercial insurance,” Mr. Karr said.

CFA, he said, has consistently misrepresented the status of themarket and what the terrorism backstop will do.

This latest report, Mr. Karr said, misrepresents how insuranceworks.

Moreover, Mr. Karr said, prior to the Sept. 11 attacks, insurerswere giving away terrorism insurance coverage, not even charging apremium.

Since Sept. 11, he added, many real consumers have not been ableto get coverage due to the lack of a backstop. That is a realcrisis, Mr. Karr said, and Mr. Hunter consistently misrepresentsthat.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, December 8, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.