Terror Proposals Diverge; Issues Remain

Terror Proposals Diverge; Issues Remain

Washington

Congress is continuing to debate how to stimulate the market for terrorism reinsurance coverage, with two possible options starting to emerge.

The Bush administration and a bipartisan group in the Senate have apparently agreed on a quota-share proposal that would require the private insurance industry to retain the first $10 billion in losses from a terrorist event.

Above that amount, losses would be shared between the federal government and the insurance industry based on a 90-10 percent split.

Although a formal bill had not been introduced as of this writing, industry representatives believe it is imminent. Senate Banking Committee Chairman Paul Sarbanes, D-Md., is expected to be one of the co-sponsors, along with Sens. Chris Dodd, D-Conn., and Phil Gramm, R-Texas.

Meanwhile, on the House side, the Financial Services Committee is apparently developing a separate proposal that centers on a loan repayment plan, similar to one outlined recently by J. Robert Hunter, director of insurance for the Washington-based Consumer Federation of America.

Although details of the plan are unclear, sources said it would likely be a three-tiered program. The first part would be a retention layer that would be smaller than the $10 billion in the Senate plan and possibly calculated on an individual company basis, rather than an aggregate basis.

The next level, which would kick in at perhaps $20 billion in losses, is a federal government loan that would have to be repaid over an unspecified number of years.

Above $20 billion, there would be a surcharge on insurance policies to pay for losses, although it is uncertain whether the surcharge would be on all policies or just commercial lines.

Both proposals are seen as having weaknesses. Bill Pollard, executive vice president of Raleigh, N.C.-based North Carolina Farm Bureau Mutual Insurance Company, said that the $10 billion aggregate trigger in the Senate proposal could seriously harm smaller, well-capitalized companies that suffer a disproportionate share of losses from a terrorist event.

In any legislation, he said, an individual company trigger, based on a percentage of surplus or other factor, should be included.

Mr. Pollard, who spoke at a recent House Financial Services Committee roundtable, said he believes House members are beginning to understand the impact that an aggregate retention could have on the industry, particularly small companies. He spoke on behalf of the Des Plaines, Ill.-based National Association of Independent Insurers, and Indianapolis-based National Association of Mutual Insurance Companies.

Joel Wood, senior vice president of government affairs for the Washington-based Council of Insurance Agents and Brokers, added there are numerous technical problems with an aggregate retention. For example, how is it allocated among companies? Moreover, he asked, how do you make a determination regarding the retention when it may be years before the full extent of losses relating to the World Trade Center tragedy are known?

As for the loan program, Julie Rochman, senior vice president of public affairs for the Washington-based American Insurance Association, said it will not do anything to encourage underwriters to return to the market.

David Farmer, senior vice president of government affairs for the Downers Grove, Ill.-based Alliance of American Insurers, agreed. It is important to keep in mind that a loan is carried on an insurance companys books as a liability, he said. Thus, it does not serve to expand capacity, he said.

Ms. Rochman said that while a loan program might help an insurance company that has solvency concerns, the immediate issue is availability.

For updates on this story, check NUs Web site, www.nationalunderwriter.com.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 5, 2001. Copyright 2001 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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