S&P: Federal Backstop Could Degrade Ratings

Fred Loeloff, a director in Standard & Poor's insurance ratings, said there is a concern "some insurers could use federal backing as a crutch. From a ratings perspective, you need to have confidence in the exposure-management capabilities of the insurer, that it can properly assess and manage its risks, without depending on government backing."

The rating firm said that while there is a compelling case for government-backstop legislation to ease constraints in the U.S. economy, its importance to insurers has diminished in the past year because carriers have drastically reduced their exposure to terrorism events.

S&P mentioned as another concern that those states that now permit insurers to exclude terrorism, could reverse themselves and require the coverage.

"Our sensitivities will be increased because companies will either, by mandate or voluntarily, be exposed to terrorism risk," Mr. Dreyer warned.

He said that data for terrorism coverage is extremely lacking, with some information available on maximum exposures. However, "with severity factors insurers have very little clue," he noted.

Mr. Dreyer observed that there is "still an enormous amount of [insurer] capital out there that has to be put to use. Insurers have been patient, but we feel that can't last forever."

S&P, he said, is watching newly-formed Bermuda companies as a bellwether. "They don't have existing business to employ capital on. They have a pile of cash and we're watching for any sign of deteriorating underwriting standards or irrational exuberance," he said. "Thus far they've shown extraordinary discipline."

S&P said that the biggest gainers from a federal terrorism reinsurance backstop bill would be the construction industry, noting that the sector "is particularly hard hit because banks are uncomfortable with lending for commercial real estate development when terror coverage is patchy."