Terrorism Cover Up In Air While Congress Battles Over Backstop

The situation is poised to change dramatically if Congress returns from its recess and actually passes backstop legislation in a lame duck session.

The House and Senate worked out a compromise bill shortly before breaking for this week's election. However, the actual language of the final legislation is still being tweaked and there remains the possibility that bitter disputes over tort liability or other details could derail the entire process, leaving insurers right where they started–exposed and determined to exclude as much terrorism risk as possible.

As a result, what the Jan. 1 renewals hold in store for would-be purchasers of terrorism coverage remained a toss-up as this story went to press.

On the one hand, Gary Marchitello, managing director of Aon's global property practice in New York, does not think that any compromise legislation that is passed and signed into law by the President would have any "dramatic" effect on property rates in general, exclusive of terrorism coverage.

However, a federal backstop law clearly would have "a meaningful commercial impact on commercial America," by increasing the availability and lowering the cost of terrorism insurance, he added. He noted that, currently, most businesses must buy such coverage on a stand-alone basis at "exorbitant" rates, if they can find the coverage at all.

On the other hand, Mr. Marchitello said it is too early to speculate what the terms and limits of terrorism coverage might look like in the upcoming renewal period without seeing the language of final federal backstop legislation.

Once the language of the bill is settled and passed into law, "step two is to see how that will be translated into all those things–rates, breadth of coverage, etc.," he said.

The indisputable effect of the bill's passage, Mr. Marchitello admitted, would be more widely available and affordable terrorism insurance, especially if the bill mandates that insurers offer the coverage–although it is not clear what the cost will be, or whether buyers will be obliged to buy it.

From his reading of both House and Senate bills, he believes that foreign insurers would have the benefit of the backstop, if they choose to use it, for terrorism risks in the United States. He reasoned that since the United States could not compel foreign insurers to offer terrorism coverage, domestic insurers also should not be required to offer the coverage.

However, if the coverage is mandatory, that could create problems for insurer financial health, even with a federal backstop, some speculate.

"Our sensitivities will be increased because companies will, either by mandate or voluntarily, be exposed to terrorism risk," said Steve Dreyer, managing director at Standard & Poor's, the New York-based rating agency.

Indeed, in a recent report, S&P suggested that the availability of federal backing for terrorism insurance could be an incentive for some carriers to take on terrorism risks recklessly in the pursuit of premium dollars.

"This business has always been subject to strong competition, and the attractiveness of cash flow is never too far from the minds of investors," observed S&P's Mr. Dreyer. "Our concern is that insurers will let down the guard they appropriately put up after Sept. 11."

Fred Loeloff, a director in S&P's insurance ratings division, observed that "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." If insurers start taking on terrorism exposures irresponsibly, S&P said, doubt would be cast on ratings.

In addition, with terrorism now seen as a long-term problem in the United States, questions have been raised about the depth of the federal government's commitment over the long haul to back up private insurers that are hit by terrorism losses.

As Swiss Re America's Mr. Dubois noted, the bill being put together in Congress envisions a three-year duration for the federal backstop program. "The idea is that within a three-year time frame, there would be enough opportunity for the industry to learn how to effectively price terrorism," he said.

But three years might be too short a period of time, he suggested. "Remember that in the U.K., the Pool Re that was set up in 1993 [to cover terrorism losses]still exists and it's not about to go away anytime soon, and in factsome of its purview has expanded recently," Mr. Dubois pointed out.

"It's hard to say how long a federal backstop would be needed, but three years is certainly better than nothing," Mr. Dubois concluded.

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.