Looming expiration may force carriers to limit risk via pricehikes, market exits

New York

As chances fade for extension of the federal backstop forterrorism insurance, problems with insurance rates and availabilitywill grow, industry officials gathered here warned.

Competition that still exists for large property-casualty riskscould soon disappear, according to executives at Standard &Poor's annual conference in a discussion of legislative issues.

They said that while the industry received some minor relieffrom class-action reform, there are major concerns about thepossible Dec. 31 sunset of the Terrorism Risk Insurance Act. “I donot truly believe that anybody understands the importance ofgetting this thing renewed,” said Stephen Lilienthal, president andchief executive officer of Chicago-based CNA.

If TRIA expires Dec. 31, “any policy that we wrote after thefirst of January is exposed without benefit of the TRIAreinsurance,” he said, referring to the federal backstop provisionin the act. “There is an embedded urgency that I don't think isbeing recognized.”

With respect to higher-valued property–”target risks”–andworkers' compensation exposures where there are concentrations ofemployees, “we could conceivably see availability problems,” hesaid.

Brian O'Hara, president and CEO of XL Capital, noted thatRepublicans in Washington advocate a free-market solution toterrorism exposure. “A lot of us would gladly [agree to] that ifthis were a free market,” he said, adding that insurance statutesprohibit carriers from excluding terrorism from workers' comppolicies, while in New York insurers can't exclude “fire-following”property exposures arising from terrorist acts.

Noting that a Nevada Democrat is leading the push for TRIA'sextension, likely urged by casino-owner constituents, Mr. O'Harasaid there is a “rural-urban” divide that adds to the problems ofgetting TRIA extended.

“Most of rural America is saying, 'What problem?'” he said,while employers in New York, Chicago and other areas with workers'comp and property exposures have the opposing view. “There's a realsplit politically in terms of urgency.”

Agreeing with Mr. Lilienthal, he said that as the TRIAexpiration gets closer without a solution, “what there is of thefree market will react. The only way to do it in workers' comp isto stop taking the risk; in property, raise prices orwithdraw.”

Asked specifically how insurers are handling the terrorism riskexposure that they are potentially taking on now with every policythey write, Mr. O'Hara said XL is already pulling the plug on somerisks.

“We are not writing any large workers' comp programs centered inhigh urban” settings, and XL has identified property risks withhigh urban exposures for non-renewal or price increases. “One wayto reduce your portfolio is to raise prices until the risks go outthe door,” he said.

Mr. Lilienthal said “there is no way to hedge this, move it,shift it–and you can't price for it.” He said he communicates hiscompany's level of risk exposure to the board of directors, notingthat communication includes a discussion of model results and thepolitical landscape.

He said it's up to the board to instruct him on whether thelevel of risk is beyond their tolerance. “Then we'll take it down,”he said, noting that he also communicates the implications of sucha move. “There are going to be mayors around the country sayingyou're bad guys,” he added.

Turning to some other legislative issues, Mr. O'Hara said thatwhile getting class-action reform passed “was helpful,” it's not asolution to rising civil litigation costs for insurers.

“What is illustrative of the real issues is the impasse at theSenate over President Bush's appeals court nominees,” he said.Noting that his own informal study of loss cost trends has foundfalling casualty loss costs under Republican administrations andrising costs under Democrats, he asserted that plaintiffs'attorneys are big contributors to Senate Democrats, who are nowblocking conservative appellate justice appointments.

“Those [judges] are very important people in the judicialprocess, particularly in our business where you have large awards”that go to appeal.

On a separate issue–asbestos claims reform legislation–Mr.Lilienthal said CNA believes a trust fund approach is the best wayto do it, putting finality on the exposure and removing the cloudsover the balance sheets of insurers.

“One way to reduce your portfolio is to raise prices until therisks go out the door.”

Brian O'Hara, President & CEO

XL Capital