Just what would the insurance world look like without some sort of federal involvement in covering terrorism risks? That's a bridge the industry and regulators are not yet willing to cross. Indeed, insurance industry and corporate buyer representatives expressed virtual unanimity that there needs to be some federal involvement in covering terrorism exposures once the Terrorism Risk Insurance Act expires at the end of next year.

Industry and buyer groups laid out their wish lists here last week during an all-day hearing of the National Association of Insurance Commissioners Terrorism Insurance Implementation Working Group.

New York Insurance Superintendent Howard Mills, who chairs the working group, said he felt the industry's position was “evolving.”

“There are those who want to stick with the federal backstop, while others are coming around to a pooling concept,” he added.

Mr. Mills said he hoped the Working Group will have a solid proposal to present to federal officials by this summer, and in that regard will be working in a parallel process with the industry to come to some consensus.

The President's Working Group on Financial Markets will serve as the first hurdle for federal scrutiny of any new regimen when it meets this fall and issues its report on the market for terrorism exposures by the end of September.

With the exception of Travis Plunkett, legislative director of the Washington-based Consumer Federation of America, no speaker at the hearing put forth any program to deal with a world in which Congress declines to take any role in backstopping private terrorism insurance coverage.

“At that point people would have to start to look at exclusions, and those are things we would have to look at,” Mr. Mills said. “But we don't want to cross that bridge because we have been adamant in not endorsing any exclusion for terrorism.”

Debra Ballen, American Insurance Association executive vice president, said her organization is participating in an all-industry process to develop a new financing mechanism that could provide a bridge between individual company capacity to assume risk and a targeted federal backstop.

“What's needed is a long-term mechanism that is sensitive to the federal government's desire to reduce its participation in this market, while at the same time recognizing that terrorism remains uninsurable,” she said.

Mr. Plunkett, however, said the industry's constant refrain about the purported uninsurability of terrorism risk has caused it to lose credibility on Capitol Hill. “Now is the perfect time for the states to put in a system that makes the end of TRIA a minor event,” he said.

Mr. Plunkett's suggestions include pools to help spread terrorism risk, rating systems vetted by state regulators, and market assistance plans to be on stand-by in the event of any market dislocation.

He urged state regulators to start planning now for no federal involvement in terrorism risk coverage, before the President's Working Group report is published on Sept. 30, so as not to appear to be “asleep at the switch” as the market's future is charted out.

Two years of record catastrophe losses and record profits proved the insurance industry is up to the task of going it alone without federal involvement, he said. He also suggested states most at risk for terrorism attacks could enact interstate compacts to spread the exposure among insurers doing business in those states.

Mr. Mills said one purpose of the hearing last week was to determine the availability and affordability of terrorism risk coverage.

Franklin Nutter, president of the Reinsurance Association of America, said currently there's coverage in the $6-to-$8 billion range for TRIA-covered exposures. He also estimated that hedge funds are providing up to $4 billion in coverage capacity, “but that is more of a transactional nature,” he noted.

Warren Heck, chief executive officer of Greater New York Mutual Insurance Company, said that figure is part of the problem. “When you consider a worst-case scenario has been estimated to be as much as $250 billion or more, a $6 billion limit is only a fraction of what is necessary for a viable private terrorism market,” he said.

Alternative risk-transfer options such as catastrophe bonds do not appear in the near term to provide any significant terrorism risk capacity. Ms. Ballen noted that only two catastrophe bonds including terrorism risk have been identified to date. The high level of uncertainty surrounding terrorism risk does not make it attractive to investors, who have so many other choices, she said.

How best to cover the threat posed by nuclear, biological, chemical and radiological risk is one vexing subset of the whole terrorism risk question, the speakers noted. Rey Becker, representing the Property Casualty Insurers Association of America, said NBCR risks pose the most serious points of contention among industry groups in trying to reach a consensus on post-TRIA planning.

Ms. Ballen suggested that perhaps the federal role could be limited to covering NBCR risk because losses from such an attack could take years to develop, presenting serious problems from a company balance sheet and rating agency perspective.

Through the CEO Roundtable chaired by Liberty Mutual's chief executive officer, Edmund Kelly, the property-casualty industry hopes to present a united front to federal policymakers at the end of this year and 2007 when the real work of persuading Congress begins, officials here noted.

Special Reports /

Insurers, Regulators Cannot Imagine Life Without TRIA Backstop

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