PCI: Terrorism Risk Rule Proposal Is Flawed

By Steven Brostoff, Washington Editor

NU Online News Service, Jan. 13, 4:11 p.m. EST, Washington?A proposed Treasury Department rule on claims payments under the Terrorism Risk Insurance Program should be reworded to ensure no one takes unfair advantage of the program, the Property-Casualty Insurance Association of America said.[@@]

In comments filed with Treasury, PCI said that the way the proposed rule is worded, it is possible that the system could be manipulated in a way that an insurance company could fail, thus putting the burden for payment of losses into the guaranty fund system.

The issue involves a provision in the proposed rule involving payments made by the federal government to an affiliated group of insurers that files a claim under TRIP.

The rule calls for the government to make a single payment of the federal share to a single insurance entity representing the group, and it is then the responsibility of the single insurance entity to distribute the payments as appropriate to affiliated insurers.

Donald Griffin, assistant vice president for business and personal lines with the Des Plaines, Ill.-based PCI, said the concern is that if an affiliated company of a group is already failing, the insurer designed to distribute the federal share could, in theory, withhold it.

PCI, he said, believes that the rule should be revised to state that the single insurance entity is required to distribute payments to affiliated insurers or to hold those funds in trust for distribution to affiliated insurers.

Mr. Griffin said it clearly is not the intent of Treasury to allow manipulation of the system, but the wording of the proposed rule is vague.

PCI is also urging Treasury to reconsider a provision in the proposed rule calling for a reduction in the federal share of compensation due an insurer by any amounts received by the policyholder or third party suffering a covered loss from any other federal program, including disaster relief.

This, PCI said, presents serious contractual problems for insurers.

If an insurer pays the loss amount required under the contract, PCI said, and Treasury deducts any amounts paid directly to the insured from its reimbursement to the insurer, the insurer suffers an unanticipated loss.

"The amount of this reduction in reimbursement cannot be calculated prior to the event and, as such, a premium cannot be developed or collected for it," PCI said.

"This is not how the program, or a typical reinsurance contract, works," PCI added.

PCI said that the rule should be revised to eliminate this problem.

"Treasury and the insurance industry will need to work closely to resolve this issue in order to make sure that insureds are adequately compensated, insurers are appropriately reimbursed, and insurers are not sued for breach of contract under these circumstances," PCI said.

PCI is the new association formed by the merger of the National Association of Independent Insurers and the Alliance of American Insurers.

The comments to Treasury were filed by NAII prior to the merger.

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PCI: Terrorism Risk Rule Proposal Is Flawed

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