Industry Calls Logic Of CFA Terror Plan Faulty

Washington

A Consumer Federation of America proposal to establish an interim loan program to help finance terrorism risks is drawing mixed reactions from the insurance industry.

The proposal which was outlined by J. Robert Hunter, director of insurance for the Washington-based CFA, at a recent meeting of the National Association of Insurance Commissioners, is intended as a temporary measure to give Congress more time to develop a long-term solution to the terrorism insurance problem.

But Carl Parks, senior vice president of government affairs for the Des Plaines, Ill.-based National Association of Independent Insurers, said the CFA proposal is based on faulty assumptions and wishful thinking.

“The CFA proposal assumes that the insurance industry could withstand another catastrophic hit of $35 billion or more and remain viable and solvent,” he said. “Its not clear how CFA arrived at this conclusion, but we disagree.”

Asserting that most insurers could withstand at least one more event of the magnitude of Sept. 11, Mr. Hunter said it is unnecessary to cover first-dollar losses. Rather, insurers should retain 5 percent of Dec. 31, 2001 surplus for terrorism losses, he said.

Under the CFA proposal, if a terrorist attack occurs and an insurer suffers claims above the retention, the company would be eligible for a federal loan with a low interest rate that could be negotiated for up to 30 years.

The CFA plan is self-contradictory, Mr. Parks said, noting that CFA said that territorial differences in rating are unfair because New York City would pay higher rates than other cities. But, in his testimony before NAIC on behalf of CFA, Mr. Hunter said that pricing should be actuarially sound.

“You cant have it both ways,” Mr. Parks said. “Without the ability to base rates on the risk involved, including territorial considerations, the premiums cannot be actuarially sound.”

Debra Ballen, senior vice president of the Washington-based American Insurance Association, said the CFA plan is “not feasible.” The main concern, she said, is that it is entirely a loan program and does not involve the transfer of risk to the federal government.

It needs to be paid back and there is too little information available about terrorism risks to rely on the fact that insurance companies will be able to pay the money back, she said.

But Kenneth Schloman, Washington counsel for the Downers Grove, Ill.-based Alliance of American Insurers, said that the CFA plan raises a number of interesting ideas. Perhaps the most valuable, he said, is the emphasis on using a percentage of surplus to determine the insurance industrys share of costs.

Pam Allen, vice president of federal affairs for the Indianapolis-based National Association of Mutual Insurance Companies, also praised Mr. Hunter and CFA for recognizing that the retention should be set on an individual company basis, rather than an industry-wide basis.

That, she said, is a very important point that members of Congress and the Bush administration have missed.

Mr. Hunter criticized both the industrys proposal to create a mutual reinsurance pool backed by the federal government as the “reinsurer of last resort,” and the Bush administrations plan for direct risk sharing between insurers and the government.

The industrys plan is such an overreach that he said he is afraid that the industry suffered a dislocated shoulder while creating it. It is also not actuarially sound, since insurers would pay nothing for reinsurance until the pool builds up $10 billion in assets. Moreover, Mr. Hunter said, insurance companies could opt in or out of the program at will.

He also noted that the administrations plan says it would, in the first year, split the first $20 billion of losses with an 80-20 split between the industry and the government. In reality, Mr. Hunter contends that if reinsurance is included in the plan, the taxpayer is exposed to 100 percent of the risk.

This is because a series of retrocessions would gradually increase the share of losses paid by the taxpayer. A primary insurer, he said, would purchase reinsurance for its 20 percent share, and the reinsurers will retrocede their 20 percent. This will increase the taxpayers share to 96 percent, he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 29, 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.

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Industry Calls Logic Of CFA Terror Plan Faulty

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