“Terrorism” is defined as any violent act within the United States for which there is reasonable belief that the act was committed for political or ideological reasons to engender fear, disrupt the economy or influence government action. However, any such act perpetrated by a foreign government official on behalf of that government would be defined as an “act of war.”

The company would be governed by a seven-member board, including the Treasury secretary, which would have authority to establish rates, premiums, retention levels and deductibles, settle claims, and exercise other traditional powers of a mutual insurer.

Coverage would be available for both commercial and personal lines. Claims would be paid following a determination by the secretary that an act of terrorism is responsible for a loss. The secretary would also be responsible for overseeing the solvency of the company.

Initial funding would come from government loans, which would have to be repaid within three years. In addition, the secretary would be able to sell to the pool retrocessional reinsurance backed by the full faith and credit of the United States. This reinsurance would indemnify the company for 100 percent of losses above those that reduce the companys capital and surplus to less than 20 percent of what it was before an event.

The secretary would also have authority to terminate the company once a finding is made that adequate reinsurance is available in the private market.

The AIA proposal also has a provision for war risk coverage that is backed by the full faith and credit of the federal government.

Alliance of American Insurers: The Alliance in Downers Grove, Ill., would create a pooling mechanism to fund losses from a terrorist attack, but it would not be a licensed insurer.

At press time, it was still undetermined who would have legal title to funds in the pool. Either through legislation or regulation, a single definition of “terrorism” would be developed.

Reinsurance coverage from the pool would take effect when either the State Department or the new Office of Homeland Security determines that a terrorist attack has occurred.

Primary insurers would retain at least $100,000 per risk. An aggregate stop loss would be calculated as a percentage of premium–possibly 5 percent. Rates would be developed by territory and recognize the differences in risks to the extent possible.

The pool would accumulate up to $100 billion in capital. If the fund is exhausted, the federal government would cover further losses.

The pool would be staffed and managed by a government agency, such as Treasury, but primary insurers would be responsible for settling claims.

No final decision has been made on whether life insurers would participate.

National Association of Independent Insurers: The “Terrorism In America Reinsurance Program” developed by the Des Plaines, Ill.-based NAII differs from the other proposals in one significant way–NAII proposes including coverage for natural disaster losses.

Under the NAII plan, a Federal Terrorism Reinsurance Fund would be created, managed by an advisory board comprised of industry representatives, appropriate federal executive branch personnel, and private actuaries.

Coverage would be written on an excess-of-loss treaty basis and the rates charged would be related to risk. Each primary insurer would choose the lines, retention (subject to a $5 million minimum) and limit of reinsurance most appropriate for its mix of business and financial condition.

This component of the NAIIs plan would sunset after three years, but could be extended by an act of Congress.

Natural disaster losses would be covered under a separate component. The trigger for such coverage would a 1-in-100 year windstorm, a 1-in-250 year earthquake and industry losses in excess of $2 billion. The maximum federal reinsurance limit would be $30 billion.

Under either component, should the reinsurance funds be exhausted, the federal government would cover losses that exceed the insurers retention levels.

Reinsurance Association of America: The Washington-based RAA would create a Homeland Security Mutual Insurance Company as a federally-chartered mutual insurer. It would be governed by its insurance and reinsurance company members and regulated by the Treasury Department.

The board of directors would include the Treasury secretary, the director of the Office of Homeland Security, the president of the National Association of Insurance Commissioners, five members of the p-c industry and two members of the life insurance industry.

A definition of “terrorism” would be developed and coverage would take effect when the director of homeland security determines that an act of terrorism has occurred.

The price for reinsurance would be actuarially determined, and retention levels would be individually negotiated between Homeland Security Mutual and insurers and reinsurers. Coverage would be available for all lines of insurance.

The federal government itself would reinsure Homeland Security Mutual, subject to an 80 percent retention. Homeland Security Mutual would also be able to buy its own terrorism reinsurance from the private market.

The federal government reinsurance coverage would take effect when Homeland Security Mutuals surplus is reduced to 20 percent of what it was the day before a terrorist event.

The Treasury Department would be able to issue bonds to meet its reinsurance obligations to Homeland Security Mutual and to meet the companys liquidity needs. The program would sunset after eight years.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 8, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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