Terrorism Insurance Loan Program Clears Committee

Washington

The U.S. House Financial Services Committee has approved a terrorism insurance assistance plan based on federal loans that private insurers would have to repay.

The legislation, H.R. 3210, which was approved late last Wednesday by voice vote, has received somewhat tepid support from the insurance industry, which argues that it might not be enough to bring capacity to the market. But Committee Chairman Mike Oxley, R-Ohio, called the legislation a “pro-taxpayer, pro-consumer proposal.”

“We have passed a backstop, not a bailout,” Rep. Oxley said. “By demanding that every dollar of American taxpayer assistance be repaid, we are providing a helping hand, not a handout.”

Rep. Richard Baker, R-La., the primary co-sponsor of H.R. 3210, said that the committee does not want to subsidize commercial insurance. “The bottom line is an attempt to limit immediate market disruption, encourage economic stabilization, protect the interests of taxpayers and facilitate a transition to a viable market for private terrorism insurance coverage,” he said.

Under H.R. 3210, a “dual trigger” mechanism would be created. Generally, the industry would be required to retain the first $1 billion of losses from a terrorist event before the federal loan program would kick in. However, if the industry experiences a $100 million loss, and any one company suffers a 10 percent hit to both its net written premium and capital, that company would qualify for the federal loan program.

Under the loan program, for aggregate losses up to $20 billion, the federal government would pay 90 percent of losses while insurance companies would pay 10 percent. Insurers would have to repay the government for the claims it pays over time. For a large event, with over $20 billion in losses, loans would be recovered via a surcharge on all commercial policyholders. During consideration of the bill, the committee adopted an amendment capping the surcharge at 3 percent of premium per year.

The program would be in effect for one year, although the Treasury secretary could extend it for two additional years.

Longer-term, H.R. 3210 would allow insurers to set up tax deferred reserves that could be used only for future terrorism claims. The reserves could also be tapped if a company becomes insolvent.

Also under H.R. 3210, insured parties are not liable for non-economic or punitive damages for insured losses.

The loan program that is the underpinning of H.R. 3210 was first developed by J. Robert Hunter, director of insurance for the Washington-based Consumer Federation of America.

The U.S. Senate is expected to follow a different path. Although details of the Senate plan were still being developed as of this writing, the speculation was that the Senate Banking Committee could move very quickly, possibly considering and approving a bill after this edition went to press. (Check the “Hot News” section of NationalUnderwriter.com for the latest developments as they occur.)

The Senate Banking Committee bill would be a direct quota-share arrangement that would be triggered by an aggregate terrorist loss of $10 billion. For losses between $10 billion and $100 billion, the federal government would pay 90 percent of claims and private insurers would pay 10 percent. The industry would not be required to reimburse the government. Above $100 billion in losses, Congress would have to evaluate what to do next.

Reportedly, the Senate committee is uncertain about whether to bar non-economic and punitive damages for terrorism losses, as did the House.

It is also possible that House Commerce Committee Chairman Ernest F. Hollings, D-S.C., will introduce a competing proposal shortly.

As for the House Financial Services Committees action, insurers said generally they are pleased the process is moving forward. “We have a bill thats moving and thats very encouraging,” said Julie Rochman, senior vice president of public affairs for the Washington-based American Insurance Association. She noted that there is not a lot of time left in this session and with reinsurance renewals at hand, the urgency for legislation is “great and growing.”

A key issue is the retention level, according to David Farmer, senior vice president of federal affairs for the Downers Grove, Ill.-based Alliance of American Insurers. A reasonable retention level, he said, is crucial if the bill is to be workable for small companies. Looking ahead, he said another important issue is how the assessments that insurers will owe to the government will be treated from an accounting standpoint.

Carl Parks, senior vice president of federal affairs for the Des Plaines, Ill.-based National Association of Independent Insurers, praised the committee for approving an amendment that gives the Treasury Department flexibility in assessing or surcharging policies that cover small businesses.


Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 12, 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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