Terror Proposals Diverge; Issues Remain

Washington

Congress is continuing to debate how to stimulate the market forterrorism reinsurance coverage, with two possible options startingto emerge.

The Bush administration and a bipartisan group in the Senatehave apparently agreed on a quota-share proposal that would requirethe private insurance industry to retain the first $10 billion inlosses from a terrorist event.

Above that amount, losses would be shared between the federalgovernment and the insurance industry based on a 90-10 percentsplit.

Although a formal bill had not been introduced as of thiswriting, industry representatives believe it is imminent. SenateBanking Committee Chairman Paul Sarbanes, D-Md., is expected to beone of the co-sponsors, along with Sens. Chris Dodd, D-Conn., andPhil Gramm, R-Texas.

Meanwhile, on the House side, the Financial Services Committeeis apparently developing a separate proposal that centers on a loanrepayment plan, similar to one outlined recently by J. RobertHunter, director of insurance for the Washington-based ConsumerFederation of America.

Although details of the plan are unclear, sources said it wouldlikely be a three-tiered program. The first part would be aretention layer that would be smaller than the $10 billion in theSenate plan and possibly calculated on an individual company basis,rather than an aggregate basis.

The next level, which would kick in at perhaps $20 billion inlosses, is a federal government loan that would have to be repaidover an unspecified number of years.

Above $20 billion, there would be a surcharge on insurancepolicies to pay for losses, although it is uncertain whether thesurcharge would be on all policies or just commercial lines.

Both proposals are seen as having weaknesses. Bill Pollard,executive vice president of Raleigh, N.C.-based North Carolina FarmBureau Mutual Insurance Company, said that the $10 billionaggregate trigger in the Senate proposal could seriously harmsmaller, well-capitalized companies that suffer a disproportionateshare of losses from a terrorist event.

In any legislation, he said, an individual company trigger,based on a percentage of surplus or other factor, should beincluded.

Mr. Pollard, who spoke at a recent House Financial ServicesCommittee roundtable, said he believes House members are beginningto understand the impact that an aggregate retention could have onthe industry, particularly small companies. He spoke on behalf ofthe Des Plaines, Ill.-based National Association of IndependentInsurers, and Indianapolis-based National Association of MutualInsurance Companies.

Joel Wood, senior vice president of government affairs for theWashington-based Council of Insurance Agents and Brokers, addedthere are numerous technical problems with an aggregate retention.For example, how is it allocated among companies? Moreover, heasked, how do you make a determination regarding the retention whenit may be years before the full extent of losses relating to theWorld Trade Center tragedy are known?

As for the loan program, Julie Rochman, senior vice president ofpublic affairs for the Washington-based American InsuranceAssociation, said it will not do anything to encourage underwritersto return to the market.

David Farmer, senior vice president of government affairs forthe Downers Grove, Ill.-based Alliance of American Insurers,agreed. It is important to keep in mind that a loan is carried onan insurance companys books as a liability, he said. Thus, it doesnot serve to expand capacity, he said.

Ms. Rochman said that while a loan program might help aninsurance company that has solvency concerns, the immediate issueis availability.

For updates on this story, check NUs Web site,www.nationalunderwriter.com.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, November 5, 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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