Homeland would provide reinsurance for all types of property-casualty insurance through the creation of two separate pools–one for commercial lines and one for personal lines.

There would be no cross-subsidies between the pools. In addition to terrorism reinsurance, the pools would cover war risks that arise under state workers compensation statutes.

While participation in either pool would be voluntary, once an insurance company chooses to participate, it would have to place all relevant business into the pool. This requirement is intended to prevent adverse selection.

A uniform definition of “terrorism” applying to all insurance and reinsurance policies sold in the United States would be established, although it was unclear at press time whether the definition would be statutory or developed by regulation.

Once the definition is established, the secretary of the U.S. Treasury would make the determination as to whether an act of terrorism has occurred.

Each company participating in the program would retain 5 percent of each risk, with Homeland assuming the remaining 95 percent.

Homeland would purchase retrocessional reinsurance coverage directly from the federal government through the Treasury Department, which would charge an appropriate premium.

The federal reinsurance would take effect following a terrorist event only if a pools surplus is reduced to less than 20 percent of what it was at the end of the previous calendar year.

The federal government would not regulate Homeland. However, some state insurance laws would be preempted by federal legislation. For example, Homeland would not be subject to state rate and form oversight.

In addition, states would be required to deem Homeland coverage as acceptable credit for reinsurance, and treat recoverables from the federal government as admitted assets.

As for taxation, Homeland would be exempt from both federal and state taxes.

Homeland would sunset in six years. However, after four years, the Treasury secretary would conduct a study and make a determination as to whether there is a need for a continued federal reinsurance mechanism for terrorism.

In addition, the secretary would determine whether a facility is necessary for natural disasters as well.

As of this writing, however, one major issue remained undecided. That issue involves the extent to which participating companies would have to contribute to state guaranty funds if a non-participating insurer becomes insolvent due to losses related to terrorism. Some insurance companies believe that participating companies should not face guaranty fund assessments if a non-participating company becomes insolvent due to terrorism.

Sources told the National Underwriter that a CEO roundtable had been set up to try to resolve this and any other outstanding issues, but would not take place until after this print edition went to press. (For updates of this story, check NU's Online News Service at NationalUnderwriter.com.)

While the outlook for legislation is better that it was a week ago, passage by Congress is still no “slam dunk,” according to Joel Wood, senior vice president of government affairs for the Washington-based Council of Insurance Agents and Brokers.

Mr. Wood said several factors have changed since last week. First, he said, there is a growing perception on Capitol Hill that this issue needs to be addressed. Second, he said, the insurance industry is coming together with a single proposal–which is much better than last week, when four separate plans were presented, he added.

Finally, he said, the plan the industry is presenting looks more like the British Pool Re system than any of the four plans that were on the table last week. That is important, he said, because Pool Re is a system that has a good track record.

Nonetheless, he said, time is short, since Congress is expected to recess by the end of October. “We face a massive challenge in a very short time,” he said.

Another source, who asked not to be identified, said he is not convinced that Congress is on board. He said that in his discussions with members of the House Financial Services Committee, he does not detect any consensus that this legislation is necessary.

Many members of the committee, he said, remain uncomfortable about putting the federal government on the hook for terrorism losses. He said he would not be surprised to see the committee examine other ideas.

The Financial Services Committees Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises is scheduled to hold a hearing on private sector solutions to terrorism insurance concerns on Oct. 16.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 15, 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.

Contact Webmaster