U.S. Re Pitches New Terrorism Facility

U.S. Re Group is gauging insurance industry and U.S. government support for a quasi-governmental, tax-exempt entity that could be a long-term successor to coverage provided under the Terrorism Risk Insurance Act.

However, TRIA is scheduled to expire on Dec. 31, and there is little time left for Congress to act on any legislation beyond must-do bills before recessing for the year, U.S. Re officials acknowledge.

Given that, U.S. Re Group officials said the most appropriate thing for Congress to do is extend TRIA, and then work next year on a long-term solution. U.S. Re developed its proposal as an advisor to the U.S. Treasury Department.

"We strongly support extension of the present program to allow time to forge an industry-government consensus on a long-term solution," said Tal P. Piccione, U.S. Re Group chairman and chief executive officer.

Under the U.S. Re Group proposal, a Terrorism Risk Reinsurance Facility–funded by insurer premiums–would be created to "establish a workable partnership between government and industry," Mr. Piccione said.

He disclosed that the company is approaching industry leaders and trade association executives with its proposal.

"We are finding a receptive attitude toward achieving an industry-government partnership," said Mr. Piccione. "Financing the coverage requires a government backstop because it is impossible to predict the frequency and severity of potential terrorism events."

Mr. Piccione noted in a paper setting out the proposal that it is not mandatory for policyholders to buy terrorism coverage, but it is mandatory for companies to offer it.

A potential strong selling point for the U.S. Re Group proposal is that it is not mandatory for insurers to join the program. However, insurers that decline to contribute would get no protection from the legislation, including a cap on terrorism losses.

Mr. Piccione said the proposal is being made public now because U.S. Re was asked last year by the Treasury Department to provide it with advice on an alternative format to the existing TRIA reinsurance program in anticipation of its sunset provision. He said Treasury has given permission for the company to release details of the work undertaken thus far to the American Insurance Association and other constituents in the industry.

"We met last week with senior executives of the AIA and plan to meet with other associations and industry leaders over the foreseeable future," Mr. Piccione said.

Flag: The Skinny

Head: How Would U.S. Re's Plan Work?

Under the Terrorism Risk Reinsurance Facility proposed by U.S. Re Group:

o The facility would pay terrorism losses in excess of individual company retentions for all commercial lines up to a maximum industry loss of $45 billion in any year.

o Industry retentions would be pegged at 15 percent of prior-year commercial premiums, or about $30 billion. This would provide up to an estimated $75 billion of terrorism coverage per year.

o Funding for TRRF would be provided by insurers through payment of a percentage of commercial lines premiums annually.

o In the event that an act of terrorism occurs before the fund is capable of paying the losses, the federal government would lend the facility money to cover the shortfall until the fund builds up.