Insurers Left In Lurch On Terrorism Risks
Washington
What seemed like a relatively quiet year for the property-casualty industry on Capitol Hill turned into an intense, trying experience in the wake of the Sept. 11 terrorist tragedy.
From dealing with a series of important, but not solvency-threatening issues related to the Gramm-Leach-Bliley Financial Services Modernization Actsuch as privacy and optional federal charteringthe industry suddenly found itself asking Congress and the Bush administration for a federal backstop to pay losses that could arise from another major terrorist event.
And the issue will continue to confront the industry in 2002. As this story went to press, Congress had adjourned and was not expected to address the terrorism insurance issue before lawmakers return from their recess in late January.
While the House passed legislation that would establish a federal government loan program to provide capital in the event of a major event, the Senate got bogged down over differences on tort reform. The Senates proposal would have established a quota-share arrangement between the insurance industry and the federal government, with the government paying the lions share of terrorism-related losses.
David Farmer, senior vice president of federal affairs with the Downers Grove, Ill.-based Alliance of American Insurers, said that looking to 2002, Congress will continue to play a role in the terrorism issue, and the industry will continue to pursue legislation. But for now, he said, the immediate activity will take place at the state level, as regulators and state legislators consider terrorism exclusions in insurance policies.
Mr. Farmer said it is encouraging that the Kansas City, Mo.-based National Association of Insurance Commissioners is demonstrating leadership at this difficult time and recognizes the solvency questions.
In addition to terrorism, Congress is expected to consider a variety of other property-casualty issues. Here is a brief summary of some of the major ones:
Federal Chartering: Leigh Ann Pusey, senior vice president of federal affairs for the American Insurance Association in Washington, said that the debate over terrorism insurance could spur interest in optional federal chartering, which AIA supports. The debate over terrorism coverage forced Congress to come to the realization that it doesnt really know the industry well, Ms. Pusey noted. This, she said, could lead some members to consider supporting a federal regulatory agency.
But Carl Parks, senior vice president of federal government relations for the National Association of Independent Insurers in Des Plaines, Ill., said that while House Financial Services Committee Chairman Mike Oxley, R-Ohio, has said his committee will examine federal chartering fairly early, his impression is that this will be largely for discussion.
The perception in this Congress, Mr. Parks said, is that a lot has to be done in terms of education before federal chartering can be taken up as a serious legislative matter. Moreover, he said, there will be a critical midterm election in 2002, and optional federal chartering is not on the political agenda of either party. The only issues likely to advance in 2002, he said, are those that play to voters.
Mr. Farmer agreed. The discussion over federal chartering will begin in 2002, he said, but given the macroeconomics of the industry, the debate over federal chartering and deregulation is not likely to be warmly received. Any regulatory modernization, he said, will take place at the state level.
Asbestos: Ms. Pusey said that efforts to establish national medical criteria for asbestos-related claims will have a lot of traction in 2002. She noted that an unusual coalition is coming together, including liberals, conservatives, some trial lawyers and industry officials, over concerns that claimants who are not actually sick are undermining the system.
Taxation: Monte Ward, vice president of federal affairs for the National Association of Mutual Insurance Companies in Indianapolis, said that NAMIC will continue to pursue legislation to modernize the small p-c insurance company tax rules.
Currently, he noted, p-c companies with less than $350,000 in annual premium are tax-exempt. Those with premium between $350,000 and $1.2 million can elect to be taxed on their investment income. Mr. Ward said that NAMIC is asking that the thresholds be raised to $551,000 and $1.8 million, respectively. This, he said, would adjust the thresholds for inflation from the time they were established in 1988.
Disaster Reserves: Mr. Farmer said that the nation and the insurance industry have had the good fortune not to have to deal with a major natural catastrophe over the past several seasons. However, he said, weather forecasters are predicting that the next hurricane season could produce more than the usual number of storms.
Allowing insurers to establish tax-deferred catastrophe reserves is something Congress might want to address, and that a segment of the insurance industry would support, Mr. Farmer said.
But Ms. Pusey said that while there will be some talk on Capitol Hill about catastrophe reserves, she believes the issue will be off the table in 2002. She noted that the issue of catastrophe reserving came up in the context of the terrorism insurance bill, although a provision in the original House bill to allow reserving was stripped out by the House Ways and Means Committee.
Congress, Ms. Pusey said, will be a little worn out by this debate and probably will not want to revisit the issue, especially for a risk that the insurance industry understands better than terrorism.
While it is reasonable for Congress to look at long-term catastrophe reserving, Ms. Pusey added, she is skeptical that Congress will examine it in 2002.
Privacy: Ms. Pusey said that to the extent Congress believes it needs to do more on privacy, the industry will have to pay attention. The industry, she said, will likely adopt more of a defensive posture than an offensive one.
Mr. Parks said he believes that privacy will come back on the radar screen in 2002, probably in the context of homeland security. Privacy interests, he said, will see what happened in the aftermath of Sept. 11, and will try to push back some of the measures taken aimed at enhancing security. He said this means that privacy advocates will seek new restrictions on data sharing.
Regulatory Modernization: Mr. Ward said that in the aftermath of GLB, Congress began taking a serious look at what states were doing to modernize the insurance regulatory system. However, after Sept. 11, everything changed, he said, predicting that the issue will be back in 2002.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 7, 2002. Copyright 2002 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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