Washington–As Congress debates whether to continue the government's backstop for terrorism coverage, a new study by the Consumer Federation of America argues that insurers should get no federal help.
"It is time to wean insurers and large real estate interests from this lucrative government program," said J. Robert Hunter, director of insurance for CFA and former Texas insurance commissioner and federal insurance administrator.
According to the CFA study, profits and financial soundness are strong, access to capital is at near record levels, and rates are falling.
The CFA study reported the insurance industry had a 92.3 percent combined ratio in the first quarter of 2005 and underwriting profits of $6.8 billion. Additionally, investment return for the insurance industry was $14 billion, the study claims, although capital market losses of $4 billion lower the total increase in retained earnings to $10 billion.
According to the CFA, these returns have already sparked increased competition as companies seek greater market share.
"It's impossible to justify terrorism insurance subsidies when insurance profits are skyrocketing, property-casualty insurance rates are sinking and beleaguered taxpayers still face growing budget deficits," Mr. Hunter said.
The Terrorism Risk Insurance Act, more commonly known as TRIA, established a federal reinsurance backstop in the event of a terrorist attack by a foreign organization.
Under TRIA the government would become involved should the damages from an attack exceed a certain threshold, currently $5 million, and insurers would be required to pay a deductible as well as assessments once they have recovered from the loss. The companies do not, however, pay any premiums for the coverage, which Mr. Hunter disagrees with.
"Had actuarially-based premiums been charged to insurers for the insurance coverage that taxpayers have provided, the Treasury Department would have amassed about $3 billion by now," he said. The report itself notes that the Congressional Budget Office "appears to favor such a premium charge" and that "even insurers have agreed there is no legitimate argument against such a charge."
TRIA is currently scheduled to expire at the end of the year, and lawmakers are debating whether to extend the program and what, if any changes should be made to it.
The original TRIA legislation mandated that the Treasury Department conduct a study of the private market's ability to cover terrorism risk. That study was released on June 30 and recommended extending the program only if changes were made to increase the burden on the insurance market.
Among those changes, according to Treasury Sec. John Snow, would be increasing the threshold for federal involvement from $5 million to $500 million.
The CFA study agreed with the Treasury recommendation and also called for the deductible for companies to be raised to $75 billion, equaling $50 billion after tax considerations and increasing co-payments for the coverage by 5 percent annually.
"By ending TRIA or sharply cutting it back and charging actuarially sound premiums for the coverage provided, Congress will enable the private sector to grow and manage this coverage," the CFA concluded in the study. "The charging of accurate, risk-related prices will also enhance mitigation efforts as policyholders seek ways to achieve discounts from insurers."
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