Study: House Terrorism Bill Costlier Than Senate's
By Steven Brostoff
NU Online News Service, Aug. 6, 1:05 p.m., Washington–Despite its payback provision, the terrorism insurance loan program approved by the U.S. House of Representatives would actually cost the federal government more than the Senate's quota-share reinsurance plan, which does not require any repayment by insurers, according to a new study.
The study, which was commissioned by the Washington-based American Insurance Association, found that the House loan program legislation, H.R. 3210, would cost $3.81 billion for each year the program was in place, amounting to $7.62 billion over two years.
By contrast, the study said, the Senate's quota-share reinsurance program would cost $1.76 billion in the first year and $1.44 billion in the second year, totaling $3.20 billion.
These figures are based on expected annual insured losses of $4.50 billion per year.
The study, which was conducted by Stephen P. Lowe of the Connecticut office of Tillinghast-Towers Perrin, cited two reasons for this result.
First, the study said, federal disbursements under H.R. 3210 begin at a lower effective threshold than S. 2600. Second, the study noted, under H.R. 3210, once the threshold is met, payments are on a first-dollar basis rather than excess over company retention.
Gary Karr, a representative of AIA, said that while the results of the study might seem counter-intuitive, it buttresses AIA's argument that the best solution for the marketplace is the Senate's structure.
The study noted that H.R. 3210 provides for repayment of federal disbursements through assessments and surcharges on insurance policies, which S. 2600 does not. However, the study pointed out, several provisions in H.R. 3210 place limitations on the rate at which these recoveries are made.
The study noted that the Congressional Budget Office, in a cost-estimate of H.R. 3210, assumed that any assessments or surcharges would be collected over an extended period, with very few of these collections occurring over the next five years. Indeed, the study said, the estimate was that only 60 percent of the expected disbursements would be recovered within 10 years.
The study said that while H.R. 3210 is designed to operate like a loan facility, collections will likely be spread over several years based on market conditions. This deferral of recoveries has a significant net impact on the traditional five-year budgetary horizon, the study noted.
In theory, the study said, the government should be able to recover the majority of disbursements under H.R. 3210. However, the timing difference between the federal disbursements and recoveries represents a significant economic cost, Tillinghast pointed out.
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