No Backstop Need, Say Consumer Groups
NU Online News Service, April 8, 4:15 p.m. EST?While insurers were busy polishing words of praise for President George W. Bush's expected effort to push a federal backstop for terrorism losses, two consumer groups weighed in with opposition to the idea.
The Consumer Federation of America and Consumers Union, shortly before the President was due to speak out on the topic, called on him to drop his support for legislation that would "give away insurance in the event of future terrorism attacks." They urged the President to spur the creation of private alternatives to "the over-priced insurance of today's market."
"The President proposes to give away insurance worth tens of billions to an industry that is flush and on the cusp of huge profit increases," said Travis Plunkett, CFA's legislative director. "In an attempt to justify taxpayer assistance for insurers, the President is overlooking a lot of good news in the market."
Mr. Plunkett added that "while 'target risks' are still having some difficulty getting coverage, and rates are higher for mid-sized and large businesses, there is plenty of evidence that a dynamic market for terror insurance is developing."
The groups said many larger firms–including those that are at the highest risk of being targeted in future terrorist attacks–are finding ways to obtain terrorism coverage.
They pointed to the fact that the airline industry is setting up its own insurance company to cover terrorism, while several large reinsurance companies, including Allianz AG and Zurich Financial Services, recently announced the formation of a joint venture to insure companies against terrorism.
The groups noted that the World Trade Center cleanup site has obtained insurance coverage. Also cited were comments by American International Group Chairman Maurice Greenberg, calling for the federal government to get out of the business of providing airlines with terrorism coverage for property losses because insurers are now willing to do so.
Banks, according to the consumer groups, are loaning money to the vast majority of all businesses, regardless of whether terrorism coverage is available. The Library Tower, the tallest building in Los Angeles, they said, is expected to be sold after purchasers obtained sufficient terrorism coverage to buy it.
Federal Reserve Chairman Alan Greenspan's remarks stating that the lack of terrorism insurance was not a threat to banks, and that the problem had not affected the economy as a whole were also cited.
According to the groups, insurers are in a better financial position than before Sept. 11 to handle future terrorism losses, and more than $25 billion in new capital has poured into the industry, whereas losses from the terrorist attacks (after taxes) will be less than that amount.
It was noted that a number of new offshore reinsurance companies have been formed, and stock prices for many of the biggest insurance and reinsurance companies are up since Sept. 11.
"The economic collapse predicted by the insurance industry has not happened, which calls into questions whether these new threats are real and whether a taxpayer bailout is needed," said Frank Torres, legislative counsel for Consumers Union. "Neither the President nor the insurance industry have proven their case."
The groups said that high insurance rates are a problem for mid-sized and larger firms, and that firms of all sizes have experienced rate gouging. The rate problem is caused by a classic turn in the economic cycle of the industry, which has been accelerated by–but not caused by–the terrorist attacks, the groups contend.
The organizations called on the President and Congress to create incentives hastening the development of affordable terror insurance alternatives.
They recommended expanding the Liability Risk Retention Act to cover all commercial property-casualty insurance, as well as personal lines. They also urged a study to determine if there are any tax disincentives for the development of captive insurance or self-insurance mechanisms.
It was also suggested that the government develop proposals to encourage the securitization of risk.
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