Kansas City, Mo. - The National Association of Insurance Commissioners (NAIC) warns that significant market disruptions could develop with the Federal Terrorism Risk Insurance Act's (TRIA) expiration on December 31, 2005, the law's current sunset date. The economy's current strength reflects the ability of businesses to cover affordably catastrophic terrorism risks.
"This is in large part due to the federal backstop put in place by TRIA," said Howard Mills, New York State's Superintendent of Insurance. "The removal of that type of protection could return the insurance market to the uncertainty experienced in the aftermath of September 11, 2001."
Terrorist acts of chaotic frequency and unknown cost, such as the ones that occurred last week in London, create challenges for the property-casualty insurance industry, whose risk models are generally built on frequent and predictable losses, notes the NAIC. The association points out that U.S. tax policy does not encourage insurers to set aside current funds for tomorrow's losses, meaning sizable terrorism losses would have to be funded by increased premiums.
State insurance regulators will not allow insurers to totally exclude insurance coverage for acts of terrorism. However, limitations on terrorism coverage have been allowed to protect the solvency of insurers. In most states, insurers have contingent endorsements that would restore the coverage limitations for damages that exceed $25 million, which existed before TRIA was enacted. In such cases, certain losses exceeding this coverage limit would not be insurable.
The Kansas City, Mo.-based NAIC is developing plans for a comprehensive program to deal with terrorist acts and large-scale natural catastrophes, now termed mega-catastrophes.
"We appreciate the work of the Treasury Department and recognize that TRIA is a temporary solution. We are working with industry and the federal government to create a long-term strategy to address a full range of large-scale claims events," said Superintendent Mills. "Meanwhile, we strongly urge Congressional action to avoid potential market disruptions likely to occur in the absence of a federal backstop."
Source: The National Association of Insurance Commissioners
