Barney Frank's Challenge

Although insurance remains (for the moment) a state-regulated business, the spotlight has clearly shifted to Washington, where the industry is fighting to defend its limited antitrust exemption and extend its federal terrorism reinsurance backstop.

However, despite the many high-profile hearings staged by Congress to bash carriers these past two weeks, perhaps the biggest challenge was delivered by Rep. Barney Frank, D-Mass., who chairs the House Financial Services Committee.

Rep. Frank–aptly named, because he's always been a straight shooter–told backers of federal regulation within the insurance community to start considering the price they'd be willing to pay for Uncle Sam's involvement in terms of greater consumer protections.

“Think about what conditions you would accept with [federal oversight], because there will be some,” he warned in a speech before the Networks Financial Institute's Annual Insurance Reform Summit.

The political calculus is simple, he noted. “There is a reason why you do consumer protections–because if you don't, people won't vote for you, but if you do, they will.”

That might mean insurers writing homeowners insurance in relatively safe areas having to offer it everywhere–including disaster-prone states. It could mean the Feds mandating “all perils” coverage, including flood exposures.

So, what about Rep. Frank's challenge? What compromises would you backers of federal regulation be willing to concede to get Uncle Sam to finally take the plunge? Where would you draw the line?

Meanwhile, although no one is trying to kill the Terrorism Risk Insurance Act just yet, another temporary extension might be the best the industry and commercial insurance buyers can hope for.

Rep. Frank said that under his version of an extension bill–likely to be introduced next month–TRIA would include group life, along with the dreaded quartet of nuclear, chemical, biological and radiological attacks, while allowing coverage for domestic terrorist attacks. “The market was not designed to deal with these criminal acts,” he wisely observed.

However, skeptics like Sen. John Sununu, R-N.H., while calling extension likely, are wary of expanding TRIA or making it permanent. “We shouldn't take action that would preclude a private market from ever developing,” he said.

Others in Congress want the program scaled back even more than it was in the last extension bill. At some point, the backstop could become virtually worthless.

The White House, never a big fan, still wants federal involvement in the terrorism risk market to “phase out,” according to Allan Hubbard, director of the National Economic Council. “The president believes, in the long run, that TRIA is not needed,” he revealed.

The lesson here is that insurers, producers and risk managers should not take TRIA's future for granted. Having Democrats running Congress helps–they've always been a stronger proponent than Republicans, who prefer leaving terrorism exposures to the not-so-tender mercies of the free market. So call, e-mail or, better yet, visit your representatives in Congress today and make the case for TRIA.

Bottom line, TRIA will survive–no politician would dare vote against anything with “terrorism” in the title and risk being called “soft on terrorism” in next year's critical election. Such fears might help win the day in arguing for expansion of TRIA coverage as well.

But expect insurers to be forced to absorb an even bigger deductible before federal reinsurance kicks in; and forget, for now, any hope of making TRIA permanent. Unfortunately, I believe nothing short of another attempted terrorist attack could make that happen politically.