The insurance industry acknowledged in congressional testimony yesterday that a lesser role for the federal government in terrorism risk insurance going forward is inevitable.
In the words of Warren Heck, chairman and CEO of the Greater New York Mutual Insurance Company, insurers strongly endorse extension of the Terrorism Risk Insurance Act reinsurance backstop measure "with modifications designed to maximize the development of a private market and to provide a viable long-term system to protect the economic strength of the country against
terrorist attacks."
He was one of 12 speakers who testified at a marathon hearing on the issue before the Capital Markets Subcommittee of the House Financial Services Committee.
Howard Mills, superintendent of the New York Insurance Department, urged the panel not to let TRIA expire at the end of the year. "It is not a question of having a backstop on Jan. 1, 2006," Mr. Mills said. "I think the primary message from everyone on this panel is no gap." He added, "We all agree that we need this yesterday."
Jason Schupp, vice president and senior assistant general counsel for Zurich, who also represented the American Insurance Association, told the committee, "The enduring risk of catastrophic terror attacks on U.S. soil leads to a continuing need for an effective insurance mechanism beyond December 31, 2005–a mechanism that must be based on the reality of the marketplace, not the hopes of theorists."
Mr. Schupp said that "there remains a critical need for a continuing public-private partnership for terrorism insurance. This is not an insurance issue; it is a business and national economic security issue."
Over the long term, John Sinnott, vice chairman of Marsh & McLennan Companies, which includes Marsh, the largest insurance brokerage, suggested that the government could be involved in terrorism risk insurance through creation of a pool reinsurance program where the government gets involved only when the funds in the pool are exhausted.
"We are aware of a number of proposals circulating which envision a pooling arrangement," Mr. Sinnott testified. "Such a mechanism would allow the insurance industry to essentially 'backstop' itself by growing the capacity to handle a catastrophic attack like those of September 11."
Currently, Mr. Sinnott said, terrorism reinsurance is limited and prohibitively expensive in many cases.
"The existence of a terrorism insurance pool and backstop may make insurers more comfortable in the market, providing them with a reinsurance vehicle that will allow them to further expand capacity," he said.
Mr. Sinnott added, "Growth in capacity will stabilize prices and decrease the need for the federal backstop over time until the government's potential liability is zero."
Mr. Heck, who also represented the National Association of Mutual Insurance Companies in his testimony, explained that Pool Re, an approach used in the United Kingdom, is a mutual insurance company that is authorized only to write reinsurance relating to terrorism risk on commercial property insurance.
He explained that Pool Re differs from normal insurers and reinsurers in that it reinsures its liabilities with the British government, to which it pays a reinsurance premium and from which it will recover any claims that exceed its resources.
"I think such a balanced private-public partnership might be a key element to protecting the U.S. economy from the sui generis risk presented by a catastrophic terrorist attack," Mr. Heck said.
Robert Hunter, director of insurance for the Consumer Federation of America, was the only witness opposing extension of TRIA in any form.
Mr. Hunter said that the insurance industry is flush with assets and capable of absorbing most losses and that extension of TRIA is postponing the creation of an adequate private market to deal with terrorism risk.
Mr. Hunter did concede that the government must be involved in covering terrorist attacks involving most weapons of mass destruction, including attacks using biological, chemical or nuclear methods.
While there is some debate as to whether TRIA covers this risk, Mr. Hunter said that "this is one area where a federal role might be needed to create such coverage in the future."
But, he said, if a federal backstop for weapons of mass destruction is created, it should require actuarial rates for the reinsurance so that taxpayers are not subsidizing insurers that don't need the help.
He also suggested that the federal government could assist in the development of private alternatives by allowing catastrophe reserves to build up tax-free on funds earmarked for the sole purpose of paying terrorism losses and nothing else, perhaps by placing such funds into fiduciary accounts not available except for the purpose of funding payments after terrorism losses are incurred.
Ernst Csiszar, president and CEO of the Property Casualty Insurance Association of America (PCI), criticized the Treasury Department for comments in the report on TRIA about the lack of need to cover general liability and commercial automobile insurance in any TRIA program going forward.
"Eliminating general liability and commercial auto from the program will make it harder for the most vulnerable employers to obtain affordable coverage tailored to their needs," he noted.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.