The U.S. insurance industry must have breathed a collective sigh of relief recently, when the Senate approved terrorism insurance backstop legislation after months of debate and delay. But now legislators must reconcile the bill, the Terrorism Risk Insurance Act (S. 2600), with a functionally disparate one passed by the House of Representatives in 2001, and cobble together a compromise.
Under the Senate bill, sponsored by Sen. Chris Dodd (D-Conn.) and cosponsored by Senate Majority Whip Harry Reid (D-Nev.), Senate Banking Committee Chairman Paul Sarbanes (D-Nev.), and Sen. Charles Schumer (D-N.Y.) and approved by a bipartisan vote of 84-14, insurers would be held liable for damages of up to $10 billion in the event of a terrorist attack. For losses greater than $10 billion, the U.S. government would pay for 90 percent of losses during the first year of the two-year program. Pending approval of the program by the Treasury for a second year, insurers would then be liable for up to $15 billion in damages.
The Senate bill also includes a per-company market share retention formula, which would allow individual carriers access to federal assistance even if their losses do not surpass the $10 or $15 billion threshold.
The legislation approved by the House last year, H.R. 3210, functions very differently: Following a terrorist attack, insurers could borrow up to $100 billion after covering the first $1 billion of losses. Carriers would then have to repay loans using revenues or premium increases—which would inevitably be passed on to policyholders. The fundamental differences between this legislation and that approved by the Senate, then, could result in protracted efforts to forge a compromise bill.
Both the Independent Insurance Agents and Brokers of America (IIABA) and the National Association of Independent Insurers (NAII) hailed the long-awaited passage of the Senate bill, and are now gearing up for a conference committee to craft final legislation.
Availability vs. affordability
Justin Roth, director of Governmental Affairs at the IIABA, explained what sort of compromise legislation his association would advocate: “The substantive problem is, is there going to be a payback mechanism, or is there going to be more of a pure government backstop? The political holdup is obviously the tort reform, which in the Senate is very loose and in the House is very strict. As far as the tort provision, that’s not our major concern, but we are more in favor of the House language. But we’d be happy with something in between the two.”
“As far as the substantive part of the bill, which is how the actual program would work, we’re more in favor of the Senate approach,” Roth continued. “It’s not that we’re completely against the House approach, but we just feel as though—with the House approach, it’s a pure payback mechanism, which means that when companies are pricing their policies, they’re going to have to price in more of the future disasters, because even though they get assistance from the government, they’d know they’d have to pay that back. They’d price that in their policies, which would price products out of the range of a lot of customers, which would obviously be bad for agents. It would hurt companies, as well.”
Roth contended that while both the House and Senate bills effectively address the issue of availability of terrorism insurance, the Senate bill also takes into account the affordability of such coverage. “While we think it’s good that the government would step in and help, having to pay back all the money—the company would have to price it in,” he explained. “With the Senate scheme, where anything after $10 billion would be a company split of 90-10, we think that’s a way that will not only address availability, but affordability. The House only really addresses availability. It takes care of availability very well, it’s just that we worry that affordability will be a problem.”
Roth added, “Realistically, I think probably it’s going to come out to be some kind of tiered system where up to a certain level we pay back, and then after that will wind up being a 90-10 type split. Both sides are pretty steadfast on where they want this bill to be. I think they’re going to have to come up with some type of compromise where you get a little of both.”
Taxpayers = policyholders
NAII director of government relations Julie Glackenbach also favors something more akin to the Senate bill, and expressed similar reservations about a loan-based program: “Obviously from our perspective, what we think would be better is if Congress enacted a true risk sharing arrangement, which is more in the Senate proposal,” she explained.
“We feel that to be best effective, it should be a true risk-sharing, in which the government bears a portion of the risk and insurers bear a portion of the risk,” Glackenbach said. “The loan payback mechanism, while it would be helpful, would not be as helpful simply because if, God forbid, we have one of these (terrorism) incidents, we wouldn’t be bouncing right back—we’d probably be in a bad economy at the very time we’d be trying to make these payments back.
“Putting these payments back onto policyholders—obviously we’re well aware that some members have a concern about having taxpayers bear responsibility,” Glackebach said. “However, when the ultimate cost goes back to policyholders, policyholders and taxpayers are the same people. It comes back to them one way or the other. I think it’s a much more efficient mechanism to do it as a risk-sharing.”
Glackenbach also noted that any compromise legislation should include a per-company limit on liability to be truly effective. “It is also imperative for us that the final mechanism include some form of per-company limitation, rather than just an overall industry aggregate,” she said. “As you know, the industry is a collection of individual companies, not a single pool … To try to come up with just a single aggregate number kind of misses that point.
“We could have, for instance, an event that could not exceed the industry total (of $10 billion), but yet be devastating to companies and individuals, and particularly if you look in the Midwest, where you tend to have a concentration of people insured by smaller companies,” she continued. “Those companies would not be able, even collectively, to bear the risk all the way up to the $10 billion. We think it’s important to have that per-company level that would allow risk sharing to come in earlier.”
Glackenbach went further, “There were obviously opponents of that during the Senate (deliberation)—part of the reason why we haven’t gone to conference yet is because Mr. (Phil) Gramm (R-Texas) is still trying to do some maneuvering and trying to eliminate that per-company cap. But I think everyone recognizes that it’s the essential ingredient, everyone from the business community, the policyholder community, all the insurers recognize that’s essential to make this process work.”
Glackenbach also emphasized the duration of a final program: “We would need to see them cobble together a program that is of sufficient duration to make the system work. As drafted, the House bill, which was passed back last year, was a one-year program going to the end of this year. Even if we get that in place now, that’s not going to be effective. So we need them to work to extend these deadlines, to give us a little more breathing room.”
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