N.Y. Insurer Highlights Flaws In Terror Act

By Mark E. Ruquet

NU Online News Service, Jan 24, 2:52 p.m.EST?The Terrorism Risk Insurance Act has serious defectswith the worst flaw being an early sunset provision, the head of aNew York commercial insurer told a gathering of agents in Brooklyn,N.Y., yesterday.

Warren W. Heck, chief executive officer and chairman of theGreater New York Mutual Insurance Company, made his comments in aspeech at the MetroRAP, put on by the Glenmont, N.Y.-basedProfessional Insurance Agents of New York.

Mr. Heck also voiced criticism over underwriters' hesitancy toprovide coverage in the New York area after 9/11.

The executive advised that insurers must provide a stablemarketplace or risk losing credibility with clients.

Mr. Heck said criticism that the industry is increasing ratesfor no reason other than to take advantage of the situation post9/11 is without merit.

His own New York-based company, Mr. Heck said, has experiencedstaggering reinsurance costs, and those costs, plus stricterunderwriting standards, must be borne by insureds.

However, he cautioned, companies need to do a better job ofgetting their financial house in order.

"Let us not fall back to those dismal days of unbridled pricecompetition and the complete sacrifice of pricing integrity," hesaid.

"As an industry, we must provide stable, predictable markets andmake available insurance coverage that protects the public. Thatcan only be accomplished through a return to disciplined and solidunderwriting practices."

He noted other insurance company heads have voiced the opinionthat years of a soft market and other economic conditions have leadto the current hard market, which could last for a few years.

The future of the industry "is far from bleak," but there are anumber of issues "undermining the financial strength of ourindustry," he noted

Mr. Heck termed it "shocking" that a large segment, as much as90 percent, of the carrier population is rated less than superiorby rating agencies. He said there are a number of reasons for thiscircumstance, "ranging from insufficient loss reserves, asbestosand environmental liabilities, and staggering jury awards to theinadequate pricing of our products."

"For the long run, as an industry, it is important that we notlose credibility with the insuring public," Mr. Heck continued."Insureds are skeptical about whether they are receiving thebroadest coverage at the lowest premium."

He said the previous soft market helped create thisattitude.

On the terrorism issue, he was critical of admitted companiesfor pulling out of markets in New York state after 9/11 becausethey could not exclude terrorism.

While he understood their economic circumstances, he added, "asan industry we also had a duty to find a way to provide insurancecoverage for terrorism losses to commercial risks to protectinsureds from financial ruin in the event of another terrorismattack."

He said the industry did not explore enough solutions similar toprograms set up in other countries that have developed terror riskprograms.

On a federal level, while the U.S. government may have beenreluctant to create another bureaucracy, it does have plenty ofexperience with catastrophic insurance programs, such as thenational flood program, that have proven to be highlysuccessful.

While the current federal backstop program is necessary, he saidit is flawed.

One reason is that the retention rates for major insurers aretoo high, Mr. Heck said. He said in a terror event equal to theWorld Trade Center major insurers would be subject to the samedegree of loss. Regional companies would fare better because theyhave secured some reinsurance.

Another problem, he added, is that the program does not covernuclear, biological or chemical events and domestic terrorism. Manyreinsurers, he said, are not offering coverage for domesticterrorism to primary companies.

Other problems he observed are conflicts over jurisdictionbetween state regulators and the federal law, creating confusion ina number of states. He suggested that urban areas may have to bearthe burden of pricing because suburban and rural clients canopt-out of the plan.

The "most serious flaw" of the terrorism backstop, Mr. Hecksaid, is that the legislation has a three-year life span, which isnot long enough for insurers to create sufficient reserves or forterrorism to disappear, owing to "the uncertainty of terrorismexposure in the future."