Industry Supports Terror Bill But Not All Agree with NBCR Mandate

June 26, 2007

At a June 21 congressional hearing in Washington, D.C., insurance industry group representatives generally spoke in favor of a bill that would extend the federal backstop for terrorism insurance coverage for another 10 years.

The Bush administration opposed this extension of the federal program, arguing no program would be better than a bad one, while insurers themselves split over a new provision mandating nuclear-biological-chemical-radioactive (NBCR) coverage.

Two Massachusetts Democrats — U.S. Rep. Mike Capuano and the Chairman of the House Financial Services Committee Barney Frank — introduced H.R. 2761, the Terrorism Risk Insurance Revision and Extension Act of 2007 (TRIREA). Supporters of the bill, which extends the Terrorism Risk Insurance Act (TRIA) for 10 years, contend it will spur the development of a private market for terrorism risk insurance.

TRIREA would extend TRIA for 10 years with current co-payments and deductibles for conventional terrorism acts as well as expand TRIA’s “make available” requirement to include NBCR coverage.

It would also change TRIA’s definition of terrorism to include acts of domestic terrorism; set the program trigger at $50 million; add group life insurance to the lines of insurance for which terrorism coverage must be made available; decrease deductibles and triggers for areas previously impacted by a significant terrorist attack; and continue to require studies of the development of a private market for terrorism risk insurance.

Not all industry representatives agreed on all aspects of the bill, however, notably the requirement that insurers make NBCR coverage available on the same terms and conditions as “conventional terrorism” coverage.

Also at issue within the industry are certain triggers that would allow smaller insurance companies to participate in the plan.

Agents back the plan

Still, two leading insurance agent trade groups, the National Association of Professional Insurance Agents and the Independent Insurance Agents and Brokers of America, both support a long-term extension of the terrorism insurance act and both see the need to address NBCR coverage in the bill.

Sharon Emek, a managing director and partner at the CBS Coverage Group, a regional agency with locations in New York City, Plainview, Saratoga and West Hampton Beach, N.Y., spoke to the subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises on behalf of the IIABA.

“The current public-private partnership created by TRIA, and extended in TRIEA, has worked well and generally as intended, allowing businesses across America to continue operating and growing, and preserving jobs in the process,” Emek stated in her testimony.

Emek said IIABA believes that the 10 year extension of the federal backstop is a “reasonable length given current market capacity.” In addition, she noted that the bill would give insurers additional legal certainty regarding their liability under the program cap.

Emek pointed out that even though NBCR losses would stem from “the most catastrophic types of terrorist attacks,” currently there is little coverage available in the marketplace for such events, other than in statutorily mandated lines such as workers’ compensation. There is essentially no reinsurance capacity for NBCR losses, she added.

No PIA representative spoke to the subcommittee on June 21, but on its Web site, PIA expresses its support for “a long-term mechanism for terrorism coverage to ensure the viability of the existing domestic insurance market.”

In a statement submitted before the subcommittee’s April 24 hearing, PIA urged lawmakers to “move without delay to pass legislation that enables the continued availability of terrorism insurance coverage.”

PIA urged that the trigger level for a federal backstop be at a “level that allows small insurance companies to participate in the program, not just large insurers.”

Better no act than a bad one

The Bush administration, through Treasury Assistant Secretary for Financial Institutions David G. Nason, opposed H.B. 2761. Nasson told the subcommittee that TRIA should be phased out in order to stimulate private sector participation in providing terrorism risk coverage.

Nason said the Treasurywould support an extesion only if it assured that the program remain temporary and short-term; private sector retentions are increased; and there is no expansion of the program.

He said these elements reflect “the positive experience under TRIA to date, and are grounded in the basic principle of limited government involvement in private markets.”

Without those “critical elements,” the Treasury department would be unwilling to support an extension of the Act. “In Treasury’s view, from both a market and economic perspective, it would be better to have no TRIA than a bad TRIA,” Nason stated.

I.I.I weighs in

But insurers, even though some don’t like all the provisions, argued that the extension is needed for the economy and government to function properly.

“Implementation of a long-term terrorism risk insurance program is an essential component of the nation’s effort to protect the financial homeland,” said Robert Hartwig, president and chief economist of the Insurance Information Institute in a statement. “The proposed 10-year extension will protect millions of businesses and their workers. It also addresses the potential ambiguity of domestic versus international terrorism acts.”

Hartwig said the program’s benefits will be felt immediately across all economic segments. “It should be particularly beneficial to the construction, commercial real estate, manufacturing, utility and transportation industries,” Hartwig added. “Governments that own and operate critical infrastructure such as airports, ports and bridges will also benefit.”

He stopped short of praising all elements of the bill. Hartwig said the provision that compels insurers to cover NBCR risks poses a concern. He pointed out that private markets “have little to no experience insuring against these risks, the magnitude of which can easily exceed the claims-paying resources of private insurers, even with TRIREA in place.”

Hartwig was not alone in questioning the NBCR mandate.

Warren Heck, chairman and CEO of the Greater New York Mutual Insurance Co., testifying on behalf of the National Association of Mutual Insurance Companies (NAMIC) and the Property Casualty Insurers Association of America (PCI), favored the long-term extension of TRIA but said the bill should not mandate that insurers provide NBCR coverage.

“Attacks utilizing weapons of mass destruction (NBCR) are the ultimate in uninsurable events and they can have qualitatively different consequences than non-NBCR attacks,” Heck told the subcommittee. “This type of threat presents dramatically larger and more concentrated risk exposures than any other threat we know of. Providing our citizens with financial protection against attacks using weapons of mass destruction is a fundamental duty of the federal government.”

According to a statement from PCI, adding mandatory NBCR risks to the program would virtually ensure TRIA’s permanence, “given that we know that many of the injuries and illnesses (latent cancers) caused by exposure to NBCR perils often do not show up for many years.”

PCI instead supports a proposal that would create an NBCR Study Commission to develop a comprehensive national approach to the issue of NBCR exposure within the next 18 months.

The American Insurance Association (AIA), on the other hand, praised the NBCR provisions. AIA President Marc Racicot, said, “Creating a long-term program which addresses the NBCR and conventional terrorism risks brings much needed stability and certainty to the market, without which long-term investment, economic development, and growth are clearly and substantially threatened.”

Like others, the AIA pointed out that coverage for NBCR risk has not been generally available, and reinsurance and “cat bond” capacity for NBCR attacks have been virtually non-existent.

Racicot said the AIA supports the provision that maintains current co-payment and deductible levels. He said it will help “keep insurers from being subject to such a high level of risk that the federal reinsurance backstop is meaningless to insurers.”

Provisions of the bill and testimony of hearing participants can be located online at

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