Insurers Reach ConsensusOn Terrorism Reinsurance

Washington

The insurance industry has reached an agreement on the majorprovisions of a proposal to create a federal role in terrorismreinsurance, but it remains unclear whether the agreement will beacceptable to Congress.

Specifically, the industry supports the creation of astate-chartered mutual insurance company called Homeland SecurityMutual Reinsurance.

Homeland would provide reinsurance for all types ofproperty-casualty insurance through the creation of two separatepools–one for commercial lines and one for personal lines.

There would be no cross-subsidies between the pools. In additionto terrorism reinsurance, the pools would cover war risks thatarise under state workers compensation statutes.

While participation in either pool would be voluntary, once aninsurance company chooses to participate, it would have to placeall relevant business into the pool. This requirement is intendedto prevent adverse selection.

A uniform definition of “terrorism” applying to all insuranceand reinsurance policies sold in the United States would beestablished, although it was unclear at press time whether thedefinition would be statutory or developed by regulation.

Once the definition is established, the secretary of the U.S.Treasury would make the determination as to whether an act ofterrorism has occurred.

Each company participating in the program would retain 5 percentof each risk, with Homeland assuming the remaining 95 percent.

Homeland would purchase retrocessional reinsurance coveragedirectly from the federal government through the TreasuryDepartment, which would charge an appropriate premium.

The federal reinsurance would take effect following a terroristevent only if a pools surplus is reduced to less than 20 percent ofwhat it was at the end of the previous calendar year.

The federal government would not regulate Homeland. However,some state insurance laws would be preempted by federallegislation. For example, Homeland would not be subject to staterate and form oversight.

In addition, states would be required to deem Homeland coverageas acceptable credit for reinsurance, and treat recoverables fromthe federal government as admitted assets.

As for taxation, Homeland would be exempt from both federal andstate taxes.

Homeland would sunset in six years. However, after four years,the Treasury secretary would conduct a study and make adetermination as to whether there is a need for a continued federalreinsurance mechanism for terrorism.

In addition, the secretary would determine whether a facility isnecessary for natural disasters as well.

As of this writing, however, one major issue remained undecided.That issue involves the extent to which participating companieswould have to contribute to state guaranty funds if anon-participating insurer becomes insolvent due to losses relatedto terrorism. Some insurance companies believe that participatingcompanies should not face guaranty fund assessments if anon-participating company becomes insolvent due to terrorism.

Sources told the National Underwriter that a CEOroundtable had been set up to try to resolve this and any otheroutstanding issues, but would not take place until after this printedition went to press. (For updates of this story, checkNU's Online News Service at NationalUnderwriter.com.)

While the outlook for legislation is better that it was a weekago, passage by Congress is still no “slam dunk,” according to JoelWood, senior vice president of government affairs for theWashington-based Council of Insurance Agents and Brokers.

Mr. Wood said several factors have changed since last week.First, he said, there is a growing perception on Capitol Hill thatthis issue needs to be addressed. Second, he said, the insuranceindustry is coming together with a single proposal–which is muchbetter than last week, when four separate plans were presented, headded.

Finally, he said, the plan the industry is presenting looks morelike the British Pool Re system than any of the four plans thatwere on the table last week. That is important, he said, becausePool Re is a system that has a good track record.

Nonetheless, he said, time is short, since Congress is expectedto recess by the end of October. “We face a massive challenge in avery short time,” he said.

Another source, who asked not to be identified, said he is notconvinced that Congress is on board. He said that in hisdiscussions with members of the House Financial Services Committee,he does not detect any consensus that this legislation isnecessary.

Many members of the committee, he said, remain uncomfortableabout putting the federal government on the hook for terrorismlosses. He said he would not be surprised to see the committeeexamine other ideas.

The Financial Services Committees Subcommittee on CapitalMarkets, Insurance and Government-Sponsored Enterprises isscheduled to hold a hearing on private sector solutions toterrorism insurance concerns on Oct. 16.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, October 15, 2001.Copyright 2001 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

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