PCI Responds to CFA Opposition to TRIA Extension

April 23, 2004

The Property Casualty Insurers Association of America has issued a quick response to the report issued by the Consumer Federation of America (CFA), which said that extension of the Terrorism Risk Insurance Act was largely unwarranted (See IJ Website April 22).

The PCI said that CFA’s Director of Insurance J. Robert Hunter’s call to let TRIA expire “should be rejected by Congress because the group’s members are not direct consumers of commercial terrorism insurance and have no standing in the debate over reauthorization of the Act.”

“We respect the work of CFA and the valuable information that it provides members on a wide variety of financial services issues,” stated PCI Sr. VP for federal government affairs Carl Parks. “But CFA members, for the most part, are not the commercial insurance consumers who are directly affected by the provisions of TRIA. Calling on Congress to let this important law expire is shortsighted and hurts not only the buyers of terrorism insurance, but all consumers who benefit from the economic stability that TRIA has helped foster.”

The PCI’s bulletin noted the CFA’s contention “that because of the industry’s improved financial condition, insurers have reserves to pay for terrorism losses without the support of TRIA’s financial backstop. However, the CFA report states that ‘To the extent that there are major losses of, say $50 billion after taxes, federal taxpayer involvement might be helpful.'”

Parks stressed that this was “exactly the point the industry made when TRIA was created.” He pointed out that “TRIA is a public/private partnership between the federal government and the insurance industry intended to ensure that resources are available to recover and rebuild from the losses caused by a terrorist attack. The program requires that the insurance industry bear a significant portion of any covered losses and that insurers pay their ‘deductible’ (equal to 10 percent of their 2003 commercial lines premium volume in 2004) before any claims are paid by the federal government. Moreover, insurers must also pay 10 percent of any losses above their deductible. TRIA is a backstop, not a bailout.”

PCI also pointed out other flaws in the CFA report. For instance, the CFA estimates that commercial lines insurers have about $142 billion in surplus. The report contends that this is enough for “expected losses” of $5.75 billion because that amounts to only about 4.5 percent of surplus. The PCI said the CFA had failed to take into consideration that a “”$50 billion loss would amount to a 35 percent reduction in surplus. This decline in surplus would increase the premium to surplus ratio for commercial lines from 1.3 to 1 to 2 to 1.

“While this is still less than the red line ratio of 3 to 1, this could mean that a number of commercial insurers would likely have premium-to-surplus ratios above that point and would be essentially out of business,” Parks commented. “Moreover, much of their existing policies would have to be picked up by other insurers, but the overall reduction in surplus would severely limit the amount of business these companies could safely write.”

The Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises and the Subcommittee on Oversight and Investigations will hold a joint hearing entitled “A Review of TRIA and its Effect on the Economy: Helping America Move Forward” on April 28, 2004.

Was this article valuable?

Here are more articles you may enjoy.