Faced with a whole new ball game of unprecedented federal backup for catastrophic losses caused by a terrorist attack, the U.S. insurance industry, including underwriters, reinsurers and brokers, are scrambling to interpret the new legislation and revise their underwriting programs to deal with the issues presented by the new law.The Terrorism Risk Insurance Act of 2002 will take effect upon date of enactment and provides for a sliding scale of government backup over its three-year life. While there seems little disagreement that the backstop will increase availability of terror risk coverage, its effect on pricing remains to be seen.
Insurance companies are now making use of three new terror risk modeling programs on the market that have been developed over the past year in the wake of Sept. 11. They were developed in response to demand from industry for something they can use to get their arms around a new risk for which traditional quantification measurements did not exist.
A subsidiary of Chicago-based Aon Corp. earlier this month came out with the most recent entrant in the terror risk model offerings, joining programs from Risk Management Solutions, Newark, Calif., and Boston-based AIR Worldwide (see "Technology Developed To Combat Terrorism Risks," November, page 6).
The tools developed by Aon use street addresses and ZIP code information to assess aggregations of property and workers' compensation exposures in terms of their proximity to 5,200 high-visibility potential targets and more than 1 million landmarks and other facilities.
Michael Bungert, president and CEO of Aon Re. Inc., says the new federal legislation will not have any direct role in the modeling efforts. "The backstop is critical as a last resort so the public is not affected by the inability to obtain insurance coverage in the event of another terrorist attack," he says.
The federal legislation, nonetheless, will have a major impact on carriers, industry experts say. It calls for federal reinsurance triggers based not only on total losses, but on losses by individual companies.
And, in another unprecedented action, the legislation mandates that if the overall trigger is not attained, the U.S. Treasury Department has the authority to assess customers of a hard-hit company up to 3% of premiums to recoup its disbursements.
Congress has been debating how to protect insurers from catastrophic losses for almost a decade. The bill as drafted by members and staffers of the Senate Banking Committee, the House Financial Services Committee and White House lawyers will be in effect until 2005. It contains language calling for a study as to whether permanent government involvement is needed, and what form that should take.
The bill containes elements of provisions passed by both chambers of Congress, but is predominately modeled after the Senate bill. Congress was scheduled to pass the bill between Nov. 12 and Nov. 22.
But congressional leadership of both parties seemed to indicate that while some powerful members, mostly conservatives, were upset at the bill-especially the fact that no stringent limits on lawsuits and punitive damages were included-it will be passed by Congress. The Republican congressional victory on Nov. 5 only reinforced its inevitability, observers note.
The wording of the current bill is to the industry's liking. Worker's compensation was included, a critical area for many companies. At the same time, intense lobbying by group life insurers paid off.
The final bill calls for a study on the issue of whether group life insurers should be included under the reinsurance program by the U.S. Treasury Department, and gives the secretary of the Treasury the discretion to include them, if warranted. The implication is that the industry has a large foot in the door that it didn't have before the final talks, and, while intense lobbying remains, the potential for being included is real.
Lawyers who have reviewed the final legislation also say business interruption insurance is fully included in the deal. According to one industry lawyer, the Senate version would not have allowed for federal payments for "profits" under business interruption provisions in policies.
This raised concerns that this would disrupt the "seamlessness" of the reinsurance. On this point and other, say one lawyer who declined to be identified, the insurance industry comes out on top. "We stressed throughout this year that the reinsurance should accurately track current commercial policies," the lawyer said.
Arthur D. Postal is Washington, D.C. bureau chief for Insurance Chronicle, a Thomson Financial Insurance Solutions publication.
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