Federal Terrorism Reinsurance Ideas Get Worse As The Debate Wears On

The latest proposal to create a federal backstop for terrorism reinsurance demonstrates just how bad things can get when you invite the federal government into your business.

Sen. Charles Schumer, D-N.Y., outlined a proposal at a recent meeting that would apparently have the federal government pay all uninsured terrorism-related losses, presumably on a first-dollar basis, for those claimants who demonstrate they could not obtain “affordable” insurance.

To prove their cases, claimants would have to obtain a certification from the relevant state insurance commissioner that “reasonably priced” coverage was not available.

So what does this mean? I must confess, I have never really understood the concept of affordability. Affordable to whom? Based on what criteria? Are claimants going to be required to bring their financial statements to state insurance departments to demonstrate how much insurance they could afford?

Will a state insurance department have to make a determination that a multinational corporation, with massive uninsured losses, could have afforded X-amount of insurance coverage, and so is only entitled to recoup the difference between “X” and its total losses?

Talk about government bureaucracy gone mad!

Let me acknowledge that there is a lot I dont know about this proposal as I write these words. The only detail Ive seen is a two-paragraph summary. It is possible that by the time anyone reads this commentary while I am away on vacation, Sen. Schumer will have released the full details of his plan, and it will be so compellingly brilliant that it will receive unanimous support.

But I am very, very skeptical that any proposal that puts the federal government, either directly or indirectly, into the business of determining affordability is something that bodes well for the insurance industry over time.

This is not to suggest that Sen. Schumers proposal has any political legs this year. Its hard to imagine anything like this getting through the Republican-led House.

The senator does say that Treasury Secretary Paul ONeill believes that his approach is “the way to go.” Lets hope that is an exaggeration, and that the Bush administration really does not want to place itself or state governments into the predicament of having to make fine distinctions about what is affordable.

Nonetheless, the proposal shows the type of ideas that crop up when what ought to be a purely private market function becomes entangled with the self-interest of politicians.

In my two previous commentaries, Ive raised questions about the consequences of federal government involvement in the insurance market, including quotes from scholars at the Washington-based Cato Institute, a free market-oriented think tank.

But I understand that the impact of the Sept. 11 tragedy on the terrorism reinsurance market is not something that lends itself to easy solutions. There might not be any good answers to the problem, only ones that are less bad than others.

I personally thought that of all the proposals presented to deal with the situation, the initial plan developed by the American Insurance Association to create a privately-owned reinsurance pool, backed by the federal government as the reinsurer of last resort and subject to federal regulation, was the best one.

It was relatively clean, contained no disincentives for businesses to purchase private insurance, and would exist for a long enough period to truly determine whether or not terrorism is an insurable risk.

But it quickly proved politically untenable, and the subsequent proposals have gotten progressively worse. The Bush Administration, along with some Senate leaders, developed a quota-share plan that would have the federal government pay 80-to-90 percent of terrorism losses. But that got bogged down over how the insurance industrys share of losses would be allocated.

Then, the House of Representatives developed its loan program, under which insurance companies would receive federal funds to help pay terrorism-related claims, but would have to pay the money back over time.

Insurers complained that a loan program would do nothing to stimulate the private market. Nonetheless, the plan seemed to have broad bipartisan backing until politics again reared its ugly head.

This time, it was the Republican leaders in the House who attached tort reform measures to the legislation that made it largely untenable to Democrats. Although the legislation passed the House, the issue of tort reform continues to complicate action in the Senate.

Now, we have Sen. Schumer, who wants the government to get into the quagmire of determining affordability.

Perhaps a relatively simple, straight-forward market-based plan on terrorism reinsurance might have been a good thing had it been enacted immediately after the Sept. 11 tragedy and served to calm fears of a disruption in insurance coverage.

But that did not happen, and as time passes, the new proposals seem to be moving in ever more troubling directions.

An old friend of mine who served many years in the Illinois state legislature used to have a saying that the best legislation is the legislation that never passes.

I have to wonder whether at the end of the day, that might prove to be the case for terrorism reinsurance.

Steven Brostoff is NU's Washington Editor. He can be reached at sbrostoff@nuco.com.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, April 1, 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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Federal Terrorism Reinsurance Ideas Get Worse As The Debate Wears On

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