In his letter to Congress on Dec. 13, J. Robert Hunter, president of the Consumer Federation of America, told lawmakers that the American Academy of Actuaries TRIA Subgroup “is not independent” from the insurance industry because of member business affiliations.
In addition, he attacked some of the particulars of the analysis itself, contending that the actuaries’ report:
o Ignored the availability of a 35 percent federal tax write-off for a $170 billion terrorism event referenced in the study.
o Didn’t “objectively discuss the incredibly small probability” of such large terrorism events or the greater likelihood of small attacks easily handled by the industry.
In a written response to NU, members of the Casualty Practice Council and the TRIA Subgroup of the Academy said the “primary message” of the Dec. 1 report by the TRIA Subgroup “was that terrorism poses a threat to our nation’s insurance reparations system that is significant and unlikely to be eliminated in the foreseeable future,” therefore requiring “some federal framework to deal with the problem.”
Given the TRIA Subgroup’s focus on the possibility of extremely large losses, “and the fact that we proposed no specific solutions to the terrorism insurance issue, there was no need…to spend the limited time available to it…addressing tax issues,” they added.
Taking on two of Mr. Hunter’s specific criticisms in turn, they also said:
o “One should not assume the federal government would automatically pay 35 percent of such losses through reductions in tax collections from insurers”–noting, for example, that an insurer rendered insolvent by large terrorism events gets no value from the carry-forward of its remaining terrorism claim tax deductions.
For survivors, they added, it might take years before deductions from an event can be used, and some may expire unused.
o “The probabilities associated with the occurrence of a terrorist attack remain judgmental and a key source of uncertainty,” they added, repeating a statement contained in the Dec. 1 public report.
With a representative of terrorism modeling firm AIR Worldwide participating in the subgroup, they said, the group focused its modeling exercises on severity estimates because of the difficulty in developing reliable frequency or probability estimates.
Mr. Hunter, in his letter to lawmakers, referenced “hundreds of terrorist events” cited in FBI reports before 2001 that were small and “have been covered by private insurance with ease.”
While the Academy respondents agreed, they added that since “few, if any,” of these would ultimately be borne by the government, “there was no need to use the FBI database in this analysis.”
Finally, they drew a parallel to natural catastrophes. “There are large numbers of windstorm ‘events’ such as thunderstorms causing losses, and only a tiny fraction…are of the magnitude of Katrina. Nonetheless, the financial implications of even one event can be enormous,” they said.