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Insurers, agents and business groups called on Congress to create a permanent solution safeguarding the economy against future terrorist attacks at congressional hearing today, “Protecting Americans from Catastrophic Terrorism Risk,” held jointly by the House Committee on Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises and the Subcommittee on Oversight and Investigations. The hearing focused on how best to protect Americans from catastrophic terrorism risk when the current Terrorism Risk Insurance Act expires at the end of 2007
The Independent Insurance Agents and Brokers of America (the Big “I”) said a continued federal role is needed to ensure the availability of terrorism risk insurance, and it is essential for the federal government to look ahead now, before backstop legislation expires.
“It is crucial that all businesses have access to affordable insurance to protect them from this risk, and I personally have seen what can happen if they do not,” said Sharon Emek, chair of the board of the Independent Insurance Agents & Brokers of New York (IIABNY) and an independent agent. “In fact, after 9/11, a number of my friends had to close their businesses because they did not have sufficient business interruption coverage. Imagine how many businesses would go out of business without any business interruption coverage at all. Without a federal role for terrorism insurance, business interruption insurance will be further strained.”
Congress passed the Terrorism Risk Insurance Act (TRIA) in 2002 and its extension in 2005, but the legislation is scheduled to expire Dec. 31, 2007.
“The federal backstop created by these laws has worked well and ensured that terrorism insurance is available and more affordable,” Emek testified.
The National Association of Mutual Insurance Companies (NAMIC) told the Subcommittees that TRIA played a major role in preventing an economic catastrophe and helping to get the country back on its feet economically after 9/11, and that the Terrorism Risk Extension Act (TRIEA), which extended the legislation until 2007, has prevented a significant tightening and possible collapse of the terrorism risk insurance market.
“TRIEA expires on December 31, 2007, and I am deeply concerned that if the Congress does not adopt a long-term private/public terrorism risk insurance program, many of our citizens who need terrorism coverage to operate their businesses across the nation will be either unable to get insurance or will be unable to afford the coverage that is available,” said Warren Heck, chairman and CEO of Greater New York Mutual Insurance Company in New York, N.Y., who testified on behalf of NAMIC.
Greater New York Mutual is the fourth largest writer of commercial multi peril business in New York State and the fifth largest writer of that business in the state of New Jersey, the largest writer of co-op apartment houses in New York City. “Without the passage of TRIA and TRIEA, our company could not have kept its market open in the same way in New York City, and retained the insurance capacity needed to write new business and grow its direct written premium,” Heck said.
“My experience tells me that without a federal program, we would find ourselves in the immediate post-9/11 situation: Insurers will exclude terrorism unless required to offer it by the states. If permitted to do so, companies that did not withdraw entirely from the market would raise their rates to levels so high that they would inhibit development and economic growth,” Heck said.
Emek noted that based on the IIABA’s experience in the market, terrorism insurance is not just a big city or a big business problem. “Policyholders across the country demand coverage,” Emek said. “We have seen terrorism coverage purchased everywhere — from small towns in Mississippi to small and large businesses in New York City. It is truly a national issue.”
Property Casualty Insurers Association of America (PCI) said that because of TRIA, six in 10 large to mid-sized businesses purchased terrorism insurance last year — a figure that rose from 27 percent in 2003. Additionally, since TRIA was passed, the cost for property terrorism insurance has dropped more than 54 percent for smaller businesses with total insured values of under $100 million.
“It has allowed businesses to continue operating and growing, and preserved jobs at virtually no cost to the federal government,” Emek said, noting prices have come down, capacity has grown, and demand is up in many geographic areas. “The program has also calmed uncertainty in the market and helped address the exclusions in policies and outright cancellations of coverage that would have resulted if it were not enacted in 2002 and extended in 2005.”
Janice M. Abraham, a member of the board of governors of the PCI and president and chief executive officer of United Educators, also testified saying that a permanent solution safeguarding the economy against future terrorist attacks is needed.
“It is necessary that a long-term program replaces the Terrorism Risk Insurance Act when its extension expires next year. Insurance policyholders and markets generally will benefit significantly from the predictability and structure a long-term program would provide,” said Abraham. “In addition, we believe a future federal program must be accessible to insurers of all sizes and should cover all losses caused by terrorism — not draw distinctions between those losses caused by some types of perils or terrorists and not by others.”
During the testimony, Abraham cited the need for a true partnership between the government and private markets for this risk. She explained that a structure can be established that continues to increase the role private markets play, but noted that at this time markets are not prepared to assume the significant additional amounts of risk.
“Experimentation and innovation are happening in these markets, but the federal government’s role in this partnership is irreplaceable,” emphasized Abraham. “This is simply too important an issue to be left to chance. It must be done.”
Long-term program
NAMIC’s Heck said that the insurance industry has been working to devise a long-term program for congressional consideration that would maximize private sector participation without threatening the economic viability of the industry.
Key elements of the plan will include:
* Creation of a federally chartered entity to facilitate reinsurance capacity below the deductibles. With voluntary insurer participation, this “middle layer” of potential risk-bearing capacity would provide the kind of private market test that some in the Congress believe is needed.
* A reasonable event trigger to facilitate participation by small and medium-sized insurers, who fill an important role in providing terrorism risk coverage.
* A separate nuclear, biological, chemical and radiological component.
Gregory Case, president and CEO of Aon Corporation, said, “Better TRIA than FEMA.” Case told a joint hearing of the House Financial Services Committee’s Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises and Subcommittee on Oversight and Investigations.
The Aon executive, whose own firm lost 176 employees in the Sept. 11, 2001, attack on the World Trade Center, said there is no question that the federal government will be involved in helping businesses and individuals recover in the event of another devastating terrorist attack.
“The issue before Congress is not whether the government will be the insurer of last resort in the event of such an attack, but rather whether the government will work with the insurance industry to thoughtfully and deliberately develop a plan to maximize private sector coverage of the massive damages that will result before an attack, rather than reacting in crisis mode after an attack occurs,” Case said.
Case testified on behalf of both Aon and The Council of Insurance Agents & Brokers.
Case said when TRIA initially was adopted in 2002, the assumption was that the private sector would be able to create a market for terror insurance coverage and that the federal program would “simply be a stop-gap measure to ensure stability while that market developed.”
“Since that time, however, it has become clear that the private sector — insurance companies, capital markets and rating agencies — has a very limited ability to insure and rate terrorism risks that are only questionably quantifiable, totally unpredictable and, thus, essentially impossible to underwrite,” he said.
“Given those realities, Aon and the members of The Council believe development of a long-term solution to the terrorism insurance crisis is essential, and that the federal government will continue to have an important role to play in terrorism risk coverage for the foreseeable future.”
He said there is ample evidence of what a “post-TRIA” market would look like if the federal backstop lapses at the end of 2007 and nothing else is put in place.
“Without TRIA, reasonably priced coverage will not be available for the major ports, oil refineries, sporting venues, hospitals, universities, airports, train stations and others that need it most,” Case said.
Private reinsurance cannot be counted on to fill the gap if TRIA expires either, he said, so it is reasonable to assume that any workable solution must involve the federal government.
Case said he agrees with Hartford CEO Ramani Ayer, who also testified at the hearing, that the federal government should provide “first dollar coverage” for nuclear, biological, chemical and radiological (NBCR) risks since they are acts of war that the insurance industry is not capable of insuring against. For other risks, he said the government should provide a “backstop,” meaning implicit reinsurance that neither the capital nor the reinsurance markets can provide.
The Government Accountability Office also issued a report this week stating that NBCR risks are not likely to be insurable by the private sector.
Case said AON supports the concept of a terrorist insurance pool that would be financed by participating insurers, each of which would contribute a percentage of written premium for all lines of insurance covered by the program. In the event of a terrorism incident, the participating insurers would first pay a pre-established amount, then funds from the pool would be tapped, and only then would the federal backstop kick in.
“The federal backstop is more likely to be tapped in early years, before the pool has a chance to fully develop,” Case said, “and the government’s potential short-term liability will decrease as the pool grows. All federal backstop payments would be repaid through policyholder surcharges or other means.”