Short-Term 'Chaos' Possible In Implementing Terrorism Bill

In the first year, the deductible would amount to 1 percent of an insurers earned premiums. This would rise to 7 percent in 2003, 10 percent in 2004, and 15 percent in 2005. (For a fuller examination of the provisions, see page 6.)

President George W. Bushs legislative office said they were hopeful he would be able to sign the measure before Thanksgiving. Once he approves the bill, terrorism exclusions will be automatically voided from policies. Insurers will have 30 days to reinstate the exclusion if they offer their insured a rate for terrorism coverage that is refused, or the insured agrees to do without the coverage.

There are no restrictions on rates, but there is some speculation that state regulators could become involved setting limits for carriers under their jurisdiction.

The Independent Insurance Agents & Brokers of America, in commending House passage of the bill, said that it was sorely needed to protect hospitals, office buildings, malls, stadiums, museums, churches and "facilities where large groups of people gather."

"This has been a challenging process that has required everyone to reinvigorate their efforts to end an unnecessary hindrance to our economy," said Robert A. Rusbuldt, chief executive officer for the Alexandria-based IIABA. "Objections to some components of the bill were overcome, and the end result will be a federal backstop that will enable many public-access facilities to attain the terrorism coverage they had great difficulty finding during the past year."

However, in the short term, the situation "may be chaotic" while insureds are deciding whether to accept or reject a terrorism premium, warned Joel R. Wood, senior vice president for government affairs at the Washington-based Council of Insurance Agents and Brokers. Brokers, he said, "are going to have to shop this around, and consumers may find they can live with less [coverage]."

He noted conflicting predictions that insurers would either gouge clients or use the government backstop as a crutch to artificially reduce rates, and said the truth might lie in between. "It will make for a chaotic December renewal period," he predicted.

Pete Bizzozero, assistant vice president for federal affairs at the National Association of Professional Insurance Agents in Alexandria, Va., said concerns by some in the industry of a precipitous drop in rates should be disregarded. "Thats not going to happen," he forecast.

There may, however, be a slackening in the pace of rising prices, so that "instead of a 150 percent increase, there will be a 75 percent increase."

A slightly different view was expressed by David Farmer, senior vice president of federal affairs for the Alliance of American Insurers. Mr. Farmer said he thought that as reinsurance treaties come up for renewal, prices will stabilize. There will be an increase in competitive forces affecting reinsurers, he said, "and there will be the same effect on primary insurers, over time, as well."

Jacques Dubois, chairman of Swiss Re America Holding Corp. in New York, said that while the legislation could result in more availability of terrorism insurance, he sees no chance of a reduction in rates because insurance capital had been reduced by Sept. 11, 2001, losses.

Scott A. Singer, executive vice president of the Singer & Bassuk Organization, which provides financing for property owners in New York City, said extraordinary increases in the cost of lining up insurance coverage can have a major impact on a buildings bottom line operating cost. He said he was hopeful the legislation would permit insurers to write terrorism insurance at "closer to the cost pre-9/11. Thats what the real estate industry needs to see."

Patricia Borowski, senior vice president for government affairs at PIA, said that for workers compensation insurance there may be more availability, but that the concerns insurers have about taking on the risk of employers who have high concentrations of workers in one location would continue.

George Pantos, Washington counsel for the Self Insurance Institute of America, said his group was happy the bill included language for captives and self-insured workers compensation programs. This is important, he said, because self-insured workers comp programs cover 40 percent of the employed workers in the United States.

By his reading, under the bill, whatever applies to insurers applies to self-insurers as well, and captive insurers are also included. Captives must obtain a finding by the Secretary of the Treasury that they are eligible, he said, but those authorized and domiciled in the United States should qualify, he added.

The chief executive of a risk modeling company said the bill has been good for his business. Hemant Shah, head of Newark, Calif.-based Risk Management Solutions, said that when the bill passed the House the week before last, his company saw a flurry of activity.

Insurers need "to know how to price the risk on the front end," said Mr. Shah, whose firm uses "game theory" to produce a U.S. terrorism risk model that the company says gives primary companies and reinsurers the ability to quantify risk to property lines and workers comp.

The bill, he said, "will change the landscape. A lot of insurers were on the sidelines this past year. With passage of the bill, theyre back in the market."

Other modeling companies said they had seen an uptick in business as well. Mike Gannon, a representative for AIR Worldwide Corp. in Boston, said although the bill was not yet law, "weve had a lot of interest already." AIR put out a terrorism loss estimation model in September, which its management says is a "solid, scientific and defensible" foundation for underwriting and setting premiums.

Following Senate passage, the New York-based Risk and Insurance Management Society called on carriers to hurry up and supply terrorism coverage at a reasonable price. "RIMS urges the insurance industry to act quickly on the legislation in relation to price, form and capacity," said RIMS President Christopher Mandel.

All of the Senators who voted against the bill were Republicans, most of whom objected to a lack of restrictions on punitive damages in lawsuits that might follow terrorist attacks. The measure does require that suits are brought in federal court or courts designated by the Judicial Panel on Multidistrict Litigation, although applicable state laws will apply.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 25, 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.