Timing, Suspicion Hurts Insurers In D.C.

Washington

At this writing, Congress appears ready to enact some form of terrorism insurance legislation that the industry wont like.

The reinsurance pooling arrangement that the insurance industry developed was dismissed without even receiving a full hearing.

Instead, Congress is considering a variety of alternatives, such as a loan program and direct government payments subject to a high level of industry-wide retention, that many industry representatives say will not be enough to stimulate the market for terrorism insurance.

The question is how did this happen?

The answer, I think, is twofold–timing and suspicion.

The former is simply a matter of happenstance, and there is very little the industry can do about it.

But the latter should cause the industry to reflect on its own history over the past 20 years or so and how it presents issues to Congress and the public.

Looking first at timing, let me use a football analogy. Its not directly applicable to this situation, but it does help illustrate the point.

As any football fan knows, when an altercation occurs on the football field, more often than not the instigator gets away with it, and the player who responds to the instigation gets flagged for the penalty. “They always get the second man,” the commentators say.

In the aftermath of the Sept. 11 tragedy, the insurance industry was the “second man.” By this I mean that Congress voted in an emergency fashion on an airline bailout bill that was not fully considered.

After approving it, many members expressed regrets over their votes, believing on reflection that the bill went too far.

Insurance, unfortunately, was the next industry to go to Congress and ask for federal assistance. Not surprisingly, Congress reacted very cautiously, not wanting to repeat the mistake it believes it made with the airline bailout bill.

On the basis of this unfortunate timing, Congress was determined to give the insurance industry a rough ride, whatever the merits of the industrys position.

But at the same time, Congress expressed genuine suspicion over the claims of the industry that it needs extensive federal intervention to insure terrorism risks, and the industry has not been able to make its case effectively that dire consequences would follow a failure to act.

This suspicion holds serious consequences for the industry, particularly as some segments of the industry pursue optional federal chartering.

Here is one line of reasoning that occurred to me. Let me present it and then invite my readers to tell me why it is wrong:

The industry claims that without federal intervention, insurance policies will exclude terrorism risks. If terrorism is excluded, lenders will refuse to extend new credit and a lot of economic activity would shut down.

But would that really happen?

Let me use another analogy that might not be fully applicable, but perhaps illustrates the point–federal crop insurance.

Its been a long time since Ive written about crop insurance, but I recall that in the early days of the crop insurance program, one of the biggest problems was convincing farmers that they had to buy it.

Many farmers made a calculation that if they suffered a major loss, they had enough political clout to force Congress to provide them with what was called “free disaster assistance.”

Thus, even without insurance, farmers continued to conduct their businesses, assuming that if a disaster struck, the federal government would be there to help.

I have to wonder whether, if Congress fails to act and terrorism becomes an excluded risk on insurance policies, lenders and other businesses will make the same calculation.

That is, they will continue to make loans and construct new buildings on the assumption that they will have the political clout to receive free disaster payments should they suffer an uninsured terrorism loss.

While there would certainly be some risk that the government would not come through, presumably, that risk would be factored into the cost of credit.

Are banks, builders and other businesses literally going to put themselves out of business if there is a terrorism exclusion, or will they find a way to muddle through?

Would Congress really allow the banking and construction industries to collapse?

And if not, is any federal government role in terrorism insurance really necessary?

These thoughts undoubtedly occurred to members of Congress and their staffs as insurance companies asked for federal assistance.

Since the federal government would pay the losses one way or the other, why should the insurance industry collect premiums at all? Whats in it for the industry?

For some reason, the industry was not able to make its case effectively that its pooling proposal was not just a scheme for the industry to collect premiums and for the government to pay losses.

Perhaps the suspicion in Congress is the result of too many past crises that were supposed to have dire consequences absent federal government involvement, but never quite did.

But whatever the reason, the industry needs to take steps to enhance its credibility, particularly if the federal government is going to assume a larger voice in insurance regulation.

Steven Brostoff is Washington Editor of National Underwriter. He can be reached at sbrostoff@nuco.com.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 3, 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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Timing, Suspicion Hurts Insurers In D.C.

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