Lame Ducks Must Pass Terrorism Bill

What is clear is that Congress does not have a clue how to craft a viable reinsurance program to restore order to the commercial insurance market.

The House passed a glorified loan program even though insurers do not need loans–they need reinsurance. The Senate's version offered a more realistic quota-share reinsurance program, but with one fatal flaw–there were no premiums charged to primary carriers for the coverage.

With 20-20 hindsight, it's clear that instead of trying to reinvent the wheel, Congress and the White House should have simply established a legitimate government reinsurance company that would charge premiums to carriers based on the exposures they face.

Under such a plan, insurers would be required to cover terrorism risks and to charge an appropriate premium for the exposures being reinsured, either on a treaty (all-business written) or facultative (individual exposure–perhaps for "trophy" properties?) basis. Buyers would be required to purchase the coverage to properly spread the risk and finance the national terrorism reinsurance pool. Should no terrorism events occur, a rebate or discount could be offered.

In addition, the plan would offer the public a fair and reasonable option to sue for damages–including punitive damages–in case of negligence. A building owner who blocks fire exits that people need to escape from a terrorist attack should face the consequences.

Instead, the House-Senate conference committee grudgingly comes up with an overly complicated hybrid bill that is going to be hard to implement, and which potentially leaves big gaps in coverage. (Personal lines carriers are left out, for example.) The bill offers reinsurance with no premiums collected. It establishes a retroactive recovery system that would force insurers to add a surcharge on commercial policies (even for buyers who decline the coverage, as the bill entitles them to do?) to repay billions in claims paid by the federal government.

It is incredible that we are still having this debate more than a year after the terrorist attacks of Sept. 11, 2001. Members of Congress are acting as if they have all the time in the world to deal with the economic threat posed by terrorism; as if the terrorists will wait until we have all our financial backup systems in place before they attempt another catastrophic attack.

This country was lucky that insurance absorbed as much of the financial loss as it did in the Sept. 11 attack. The industry certainly did not intend to cover such an event, and insurers that had a legal choice were absolutely right to distance themselves from this exposure as soon as renewals came due.

Only an act of Congress can change the economic dynamics here and allow the industry to write coverage once again.

So, what's taken so long? Why is Congress bickering over side issues like tort liability when many insureds are going bare, and when the industry's solvency is at risk? And why is the insurance industry the "bad guy" in this debate?

The knee-jerk reaction of consumer groups was that federal terrorism reinsurance would be a "bailout" of the industry, which is total nonsense.

Direct subsidies to the airlines was a bailout. But under this bill, insurers would still have to absorb billions in losses on their own, and would have to recover billions more via surcharges. How is that a bailout? What the bill attempts to do is provide federal reinsurance to spread the risk, facilitate commerce, and protect people and assets. That's the real world reality–something Congress and consumer groups all too often fail to grasp.

The insurance availability crisis is supply and demand in action. No reinsurer will touch terrorism–the risk is just too large to absorb on their own. There isn't enough capacity. Only the government has the resources to backstop such a massive exposure.

Of course, seeking a government backup is risky for those in the industry who do not want federal regulation. The compromise bill delegates a lot of the rulemaking authority to implement the terrorism reinsurance bill to the Treasury Department. Like it or not, if this bill passes, the Feds are in the insurance business.

But even the National Association of Insurance Commissioners–the bastion of state regulation–backs the concept of a federal terrorism reinsurance program because they know the public will never get adequate coverage without such a system in place.

The compromise bill now before the conference committee is seriously flawed, but its passage is critical to reestablish a market for terrorism coverage. Insurers, agents, corporate insurance buyers and state regulators need to turn up the heat after Election Day to get a bill passed into law before it's too late.

It is ironic that the bill will meet its fate during a "lame duck" session of Congress. "Lame" is the word for the behavior of Congress thus far, playing political football with a life and death issue for the economy and the public.

If this is indeed political football we're playing, we're well past the two-minute warning. A lame duck session means we're in overtime, and this country cannot afford a defeat of this bill.

Sam Friedman is NU's editor-in-chief. He may be reached at sfriedman@nuco.com.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 4, 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.