Economy Could Drown If Re Pool Isn’t Created
Expect a fierce battle in Washington over the creation of some sort of federal reinsurance mechanism to back up private insurers in case of another major terrorist attack like the Sept. 11 destruction of New York’s World Trade Center.
We commend the insurance industry for its quick action to formulate a compromise proposal from four different plans put forth by various insurance company associations. The result was a plan to create a state-chartered mutual reinsurer, Homeland Security, to cover property-casualty risks via two separate pools–one for personal lines, the other for commercial.
However, the Bush administration has entered the fray with a plan of its own under which losses from a terrorism event would be shared between private insurers and the government. The program would run for three years, with the share of losses divvied up differently each year.
In addition to having certain fundamental problems with the industry’s proposal, the administration believes the industry’s plan is too complex to be set up in so short a time, with Congress set to adjourn soon. Thus, the White House came up with a streamlined version of a straightforward quota-share reinsurance deal of its own that would expire in three years.
The Bush plan is already taking its lumps from both sides of the debate. Foes in Congress oppose what they decry as a bailout of a still healthy insurance industry. Meanwhile, certain insurance officials believe the administration’s plan would be in place for too short a time to be effective, while still leaving private carriers on the hook for unacceptably high catastrophic losses.
Push will definitely come to shove on this issue, but the industry, Congress and the White House must find a way to pass a compromise plan before Congress adjourns. The stakes are too high to delay. With Jan. 1 renewals looming, and reinsurers insisting that terrorism must be excluded to maintain their solvency, failure to act could have massive repercussions for a fragile economy.
Without reinsurance support, insurers will have to exclude terrorism attacks, leaving builders and lenders in the lurch and many construction and investment plans abandoned on the drawing board. We are already on the brink of a recession, so a serious withdrawal of insurance capacity now could push the economy over the cliff.
Like it or not, the insurance industry needs to be prepared to support the Bush administration’s proposal. While it might not be the industry’s first choice, it could be the only alternative.
Without Bush administration support, the joint industry-backed initiative is likely dead. There is too little time remaining before Congress adjourns to fight the President’s plan. It would simply lead to delay, and with January renewals just around the corner, delay is the one thing the industry cannot afford.
Whatever the merits of the industry’s arguments, the political realities cannot be ignored. Any plan, even one that is less than satisfying, is better than no plan at all if inaction means a commercial insurance vacuum that sucks the life out of the U.S. economy.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 22, 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.