Coverage Crisis Looms, Insurers Warn

Washington

While “the sky did not fall” on Jan. 1, a crisis nevertheless looms in the commercial insurance market unless Congress enacts a federal backstop for terrorism losses, industry officials warn.

During a recent hearing here before the Reinsurance Task Force of the National Association of Insurance Commissioners, representatives of primary insurers and reinsurers painted a grim picture of the insurance market since the terrorist attacks of Sept. 11.

Since Jan. 1, 2002, terrorist acts have been excluded in reinsurance agreements, noted Warren Heck, chairman of the New York City-based Greater New York Mutual Insurance Company. Moreover, he said, significant rate hikes accompany these exclusions.

This has forced primary insurers to respond by either non-renewing policies, excluding terrorism coverage where possible, or limiting primary coverage amounts, Mr. Heck said. “All these factors can only lead to one conclusion: Failure to enact some sort of federal backstop will ultimately have a stultifying effect on our economy and any possible economic recovery,” he said.

The problem is particularly acute in workers compensation, according to Dick Thomas, senior vice president with New York-based American International Group. There is no provision in workers comp rates for catastrophic losses, he said, adding that reinsurance premium increases for workers comp will not be 100-to-300 percent as is the case for other lines, but could be 6,000 percent over what AIG paid last year.

Robert McClennan, chief executive officer of Florists Mutual Insurance Company in Edwardsville, Ill., said action is needed before the country faces a “lose-lose” situation. “Legislation is of vital importance to the stability of the marketplace,” he said, speaking for the Alliance of American Insurers.

Mr. Heck, who represented the National Association of Mutual Insurance Companies, added that the hard market, which began prior to the Sept. 11 attacks, is responsible only for a small portion of the rate increases. Prior to Sept. 11, he said, his company was seeing reinsurance rate increases of around 10 percent. But after Sept. 11, he noted, prices have gone “through the stratosphere”–rising from 100-to-200 percent. These hikes are solely related to Sept. 11, he added.

Debra T. Ballen, senior vice president with the Washington-based American Insurance Association, warned that while the “doomsday scenario” that some predicted for Jan. 1 has not come to pass, the fundamental problems arising from the uninsurability of terrorism risks has not gone away. “Should a major terrorist attack occur under this scenario, the resulting financial distress in both the insurance and business sectors would extend far, far beyond the Sept. 11 scenario, as bad as that scenario has been for the insurance industry and the economy at large,” she said.

But Ronald Ferguson, chairman of the Stamford, Conn.-based General Reinsurance Corp., acknowledged that prospects for a comprehensive federal program are uncertain, at best. Indeed, he said, although the loan program approved by the House of Representatives and the quota-share plan considered by the Senate were “good faith” attempts to address the issue, he does not believe they would have resulted in the kind of comprehensive program that is needed.

If Congress fails to enact a comprehensive program, he said, the best alternative is to let the market work, meaning that state statutes need to be changed to permit war and terrorism exclusions for certain lines, such as workers comp. “We learned from the Sept. 11 attacks that the concentration of workers comp exposures can easily result in losses beyond the capacity of most insurers and reinsurers to absorb,” he said.

Second, he said, states must avoid mandated coverages for terrorism that will reduce, rather than increase, the availability of insurance. Allowing markets to work will allow insurers and reinsurers to provide the maximum amount of coverage they can at the lowest possible cost, he said.

Over time, Mr. Ferguson said, the risk appetite and underwriting abilities of insurers and reinsurers might adjust to meet the changing shape of terrorism insurance and provide more private market coverage than is currently available.

“In the meantime, policyholders will continue to have the benefit of a competitive marketplace for those exposures that insurers and reinsurers can reasonably and prudently underwrite and price,” he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 28, 2002. Copyright 2002 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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