Congress Hears Insurers On Federal Terror Reinsurance
Congress took the first tentative steps last week towards setting up a “reinsurer of last resort” for losses caused by acts of terrorism like those of Sept. 11.
At a House Financial Services Committee hearing, the concept of a federal reinsurance pool was promoted by insurance industry representatives as a logical next step after the industry resolves losses arising from the Sept. 11 tragedy.
Dean OHare, chairman of Warren, N.J.-based Chubb, said that federal legislation is needed “quickly.” Already, he said, it is impossible for a commercial insurer like Chubb to acquire reinsurance that does not have a terrorism exclusion.
If reinsurers exclude terrorism, he said, primary companies will not be able to issue policies that cover terrorism.
Ronald Ferguson, chairman of Stamford, Conn.-based General Re, added that while the insurance industry will be able to pay all the losses from the Sept. 11 tragedy without a federal government bailout, it is important to understand that the losses are being paid out of industry capital. Not a single premium dollar was collected for this type of loss, nor was any money earmarked to pay claims, he said.
He added that while the total capital of the U.S. insurance and reinsurance industry is about $300 billion, the exposure from the Sept. 11 terrorist attack is not spread evenly across the industrys capital base. The affected insurers and reinsurers, he said, have a combined total capital base of about $120 billion.
That capital, he said, can obviously fund the losses arising from the attack. However, industry capital will not be able to sustain multiple events, he said.
A major question in creating a possible federal government reinsurance pool, Mr. Ferguson said, is striking the right balance between the private sector and government. If private companies want to write terrorism coverage, they should be able to do so, he said.
Kansas Insurance Commissioner Kathleen Sebelius, president of the Kansas City, Mo.-based National Association of Insurance Commissioners, urged Congress to proceed cautiously. There is always concern, she said, about what a government-backed mechanism will do to the private sector.
While there is a need to put the issue of a federal reinsurance pool on the table, it is “not uncomplicated.” Congress, she said, will have to consider the unintended consequences of a federal facility.
Still, in her written testimony, Ms. Sebelius said that NAIC knows that the insurance industry cannot withstand multiple events of this magnitude without harm to all consumers. Thus, she said, Congress should look at proposals to form a terrorism reinsurance pool so that risk of loss from terrorist activities can be spread as broadly as possible.
One senior member of the Committee, Rep. Richard Baker, R-La., addressed the issue of industry regulation. Generally, he said, he believes that the federal government is too intrusive in the private sector. But in this case, Rep. Baker said, he would be very reluctant to look at proposals that put taxpayers on the hook for these losses without federal government oversight.
Rep. Baker chairs the Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises, which would likely have initial jurisdiction over any proposal on government reinsurance.
The Ranking Democrat on that Subcommittee, Rep. Paul E. Kanjorski, D-Pa., also expressed concern. “To the extent possible,” he said, “we must also consider allowing market discipline to respond to these events without government intervention.”
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 1, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.