The insurance industry's performance of late has been remarkable. Consider that in 2005 it was hit with Hurricane Katrina, a $40 billion loss event. Following that disaster, property rates leapt up in affected markets, which in turn attracted new capital and led to a number of innovations in managing catastrophe risk. Now, nearly two years after Katrina, the industry is healthier than ever. According to the Insurance Information Institute, it ended 2006 with a $31.2 billion underwriting profit, a stellar 92.4% combined ratio and a record surplus of $487 billion.
To put the industry's performance in perspective, all we have to do is go back a few years. It finished 2001 with a $53 billion underwriting loss, a 116% combined ratio and just $290 billion in surplus to pay claims and support the writing of new policies protecting families and businesses.
The industry's stunning turnaround is a testament to free markets, more disciplined underwriting, better use of technology, a shakeout of weak competitors and a demand for the industry's product, among other factors. Certainly luck also played a role in the form of moderate interest rates and a benign 2006 hurricane season. But one gets the impression that even if last year's hurricane losses had been in line with historical averages, the industry would be doing OK.
Given this picture, it's fair to ask just how much governmental help the industry needs to continue providing terrorism insurance. Following the events of 9/11, which created the largest loss ever for insurers--until it was eclipsed by Katrina--the answer was quite a bit. The Terrorism Risk Insurance Act, which became law in November 2002, helped settle a badly shaken, financially vulnerable industry (look again at those 2001 results) by promising that in the event of another act of terrorism committed on behalf of a foreign interest and causing as little as $5 million in losses, the government would ride to the rescue. Individual insurers affected by an event would pay deductibles that amounted to 7% of their annual direct earned premiums. The industry as a whole also would have a $10 billion aggregate retention. Other than that, the government would pay 90% of losses, up to the program's $100 billion cap.
From the beginning, the Bush Administration was leery of creating a permanent program for the industry. TRIA was viewed as a three-year stopgap to help the industry get its legs and adjust to the new reality of terrorism. Indeed, carrier deductibles and the aggregate retention were to rise during TRIA's second and third years, the idea being that insurers would be gradually "weaned' off the federal program.
In 2005, the insurance industry legitimately argued that it was too soon to dismantle the federal backstop. The Bush Administration concurred but got most of what it wanted in the two-year extension ultimately enacted. It required a terrorism event to cause at least $50 million in losses for the feds to step in, and this trigger rose to $100 million in 2007. Insurers' deductibles and aggregate retention also were increased each year of the extension, and commercial auto and several other coverage lines were dropped from the program. Meanwhile, an effort in the House to broaden the program to include acts of domestic terrorism and add coverage for group life was rebuffed. So was an attempt to require insurers to offer coverage for nuclear, chemical, biological and radiological (NCBR) terrorist attacks, with the program providing broad support for such coverage.
The TRIA extension is set to expire at the end of the year, and Congress has started to take up the question of what comes next. The political landscape in which that question will be answered is far different from what it was in 2002 and 2005. Democrats, who on this issue have been more sympathetic to the insurance industry than Republicans, are now in control of Congress. That was reflected last month in the introduction of the Terrorism Risk Insurance Revision and Extension Act of 2007 (H.R. 2761) in a subcommittee of the House Committee on Financial Services. Among other things, H.R. 2761 would extend the federal program for 10 years, scale back the trigger to $50 million, and keep the current retentions and deductibles, rather than continue to increase them. Again, coverage would be broadened to include domestic terrorism, group life and NCBR attacks.
Among those testifying in favor of H.R. 2761 were the Independent Insurance Agents & Brokers of America and Marsh, which did so on behalf of the Council of Insurance Agents & Brokers. Associations representing insurers also were generally supportive, although at least one, the Property Casualty Insurers Association of America, said it wanted no part of the mandatory NCBR coverage requirement.
Meanwhile, a weakened Bush administration seems to be the only party calling for a smaller federal role. In his written testimony, David G. Nason, Treasury Assistant Secretary for Financial Institutions, said the administration continues to think that the private sector can handle the terrorism risk with more efficiency and innovation than the government can. He added that the White House was unlikely to support an extension unless it is short-term and continues to decrease the government's role in terrorism insurance. If it wants to go to the mattresses, the Bush administration might be able to defend that position, since H.R. 2761 doesn't seem to have much Republican support. I think it's safe to say that a) some kind of extension will be enacted and b) it will be less generous to insurers than H.R. 2761.
At least I hope so. Some would say the insurance industry's recent performance is merely due to a temporary bout of sanity, but I'm inclined to think the change is more lasting. Without question, terrorism will pose a formidable underwriting challenge for the foreseeable future, but I'd like to think the industry is now strong enough and savvy enough to start taking on that challenge rather than shrink further from it.
To put the industry's performance in perspective, all we have to do is go back a few years. It finished 2001 with a $53 billion underwriting loss, a 116% combined ratio and just $290 billion in surplus to pay claims and support the writing of new policies protecting families and businesses.
The industry's stunning turnaround is a testament to free markets, more disciplined underwriting, better use of technology, a shakeout of weak competitors and a demand for the industry's product, among other factors. Certainly luck also played a role in the form of moderate interest rates and a benign 2006 hurricane season. But one gets the impression that even if last year's hurricane losses had been in line with historical averages, the industry would be doing OK.
Given this picture, it's fair to ask just how much governmental help the industry needs to continue providing terrorism insurance. Following the events of 9/11, which created the largest loss ever for insurers--until it was eclipsed by Katrina--the answer was quite a bit. The Terrorism Risk Insurance Act, which became law in November 2002, helped settle a badly shaken, financially vulnerable industry (look again at those 2001 results) by promising that in the event of another act of terrorism committed on behalf of a foreign interest and causing as little as $5 million in losses, the government would ride to the rescue. Individual insurers affected by an event would pay deductibles that amounted to 7% of their annual direct earned premiums. The industry as a whole also would have a $10 billion aggregate retention. Other than that, the government would pay 90% of losses, up to the program's $100 billion cap.
From the beginning, the Bush Administration was leery of creating a permanent program for the industry. TRIA was viewed as a three-year stopgap to help the industry get its legs and adjust to the new reality of terrorism. Indeed, carrier deductibles and the aggregate retention were to rise during TRIA's second and third years, the idea being that insurers would be gradually "weaned' off the federal program.
In 2005, the insurance industry legitimately argued that it was too soon to dismantle the federal backstop. The Bush Administration concurred but got most of what it wanted in the two-year extension ultimately enacted. It required a terrorism event to cause at least $50 million in losses for the feds to step in, and this trigger rose to $100 million in 2007. Insurers' deductibles and aggregate retention also were increased each year of the extension, and commercial auto and several other coverage lines were dropped from the program. Meanwhile, an effort in the House to broaden the program to include acts of domestic terrorism and add coverage for group life was rebuffed. So was an attempt to require insurers to offer coverage for nuclear, chemical, biological and radiological (NCBR) terrorist attacks, with the program providing broad support for such coverage.
The TRIA extension is set to expire at the end of the year, and Congress has started to take up the question of what comes next. The political landscape in which that question will be answered is far different from what it was in 2002 and 2005. Democrats, who on this issue have been more sympathetic to the insurance industry than Republicans, are now in control of Congress. That was reflected last month in the introduction of the Terrorism Risk Insurance Revision and Extension Act of 2007 (H.R. 2761) in a subcommittee of the House Committee on Financial Services. Among other things, H.R. 2761 would extend the federal program for 10 years, scale back the trigger to $50 million, and keep the current retentions and deductibles, rather than continue to increase them. Again, coverage would be broadened to include domestic terrorism, group life and NCBR attacks.
Among those testifying in favor of H.R. 2761 were the Independent Insurance Agents & Brokers of America and Marsh, which did so on behalf of the Council of Insurance Agents & Brokers. Associations representing insurers also were generally supportive, although at least one, the Property Casualty Insurers Association of America, said it wanted no part of the mandatory NCBR coverage requirement.
Meanwhile, a weakened Bush administration seems to be the only party calling for a smaller federal role. In his written testimony, David G. Nason, Treasury Assistant Secretary for Financial Institutions, said the administration continues to think that the private sector can handle the terrorism risk with more efficiency and innovation than the government can. He added that the White House was unlikely to support an extension unless it is short-term and continues to decrease the government's role in terrorism insurance. If it wants to go to the mattresses, the Bush administration might be able to defend that position, since H.R. 2761 doesn't seem to have much Republican support. I think it's safe to say that a) some kind of extension will be enacted and b) it will be less generous to insurers than H.R. 2761.
At least I hope so. Some would say the insurance industry's recent performance is merely due to a temporary bout of sanity, but I'm inclined to think the change is more lasting. Without question, terrorism will pose a formidable underwriting challenge for the foreseeable future, but I'd like to think the industry is now strong enough and savvy enough to start taking on that challenge rather than shrink further from it.
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