AIA, she said, is not wedded to any specific proposal. The Bush administration, she added, has been very helpful in working with the industry to seek a solution to insurance issues arising from the Sept. 11 terrorist attacks.

However, she said that whatever mechanism is created, it must immediately jumpstart the marketplace for terrorism coverage. Any program that does not immediately draw capacity to the market will be a failure, she added.

Under the administrations plan, the federal government would directly absorb up to 90 percent of losses from an act of terrorism. The program would run for three years, with private insurers and the government sharing different percentages of losses each year:

Beginning in 2002, private insurers would pay 20 percent of insured losses for the first $20 billion of losses resulting from a terrorist event. The government would pay 80 percent. Above $20 billion, insurers would pay 10 percent and the government would pay 90 percent.

In 2003, private insurers would pay 100 percent of the first $10 billion of losses. The losses between $10 billion and $20 billion would be shared equally between insurers and the government. For amounts above $20 billion, insurers would pay 10 percent and the government would pay 90 percent.

In 2004, insurers would pay 100 percent of the first $20 billion in losses. Between $20 billion and $40 billion, insurers and the government would share the losses equally. Above the $40 billion threshold, insurers would pay 10 percent and the federal government 90 percent.

The program would be capped at an aggregate of $100 billion. If the aggregate losses from terrorism exceed $100 billion, the administration would seek guidance from Congress on what to do.

Following a terrorism event, a private insurer would first pay its portion of the loss. It would then file the balance of its claim with the Treasury Department, along with verification that it had paid its portion. The Treasury Department would then pay the balance.

According to an administration official, the plan, which is still being drafted, would contain some loss mitigation provisions, including consolidation of claims into a single form and a prohibition on punitive damages. It would include a definition of terrorism based on existing standards, and it would be up to the Treasury Secretary to certify that a terrorist event has occurred. The program would only cover property-casualty insurance.

At a briefing, the administration official said that the White House believed the AIA plan was too complex to put together in a short period of time. Since this is an issue that should be addressed before Congress adjourns, the official said, setting up a reinsurance pool would create a lot of complexity, “and you dont get a whole lot for it.”

The official added that the administration has concerns about establishing a pool that is a monopoly. “It would get the Treasury in the business of regulating”–something the administration wants to avoid, the official said.

Private insurers, the official added, are free to set up their own reinsurance pool to cover their share of the losses under the administrations plan. “But setting up a federal regulatory structure with rate regulations and financial integrity standards along the lines of what exists in the U.K., again, did not seem to be the right approach,” the official said.

However, several industry representatives, who asked not to be identified, said they are concerned about the retention levels, particularly in years two and three of the Bush plan. Those levels, they said, might be too high to accomplish the goal of the plan, which is to revitalize the private market for terrorism insurance.

One source said there is some pessimism over whether the administration will be willing to alter the retention levels. At a meeting between insurer and Treasury Department officials, he said, Treasury seemed reluctant to allow any changes.

A representative of the Washington-based Reinsurance Association of America, who asked not to be identified, said reinsurers have concerns with the Bush plan, but are committed to working with the administration and Congress. The hope, the source said, is to reconcile the administrations approach with the industrys.

Anne Sittmann, a representative of the Des Plaines, Ill.-based National Association of Independent Insurers, said NAII looks forward to seeing the final details of the Bush proposal and wants to work with the administration on the operational details.

David Farmer, senior vice president of federal affairs for the Alliance of American Insurers in Downers Grove, Ill., called the administrations plan a positive step in the direction of getting a program in place before Congress leaves town. While there are some concerns, he said, they can hopefully be addressed as the process moves forward.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 22, 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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