U.S. insurers completed a draft proposal on Oct. 10 for a $10 billion government-backed insurance pool that they hope will protect them from further terror attacks after the destruction of the World Trade Center.
According to a Reuters report, the proposal now has to be forged into a bill, which insurers hope will be introduced in Congress next week.
According to Joel Freedman, director of government affairs at insurer Hartford Financial Services Group Inc., It (the proposal) is modeled very much after Pool Re in the UK. The British government set up Pool Re in the early 1990s after repeated bomb explosions in London.
Insurers say federal support for terror attacks is needed in light of the $40 billion or so in claims figured to come from the Sept. 11 attacks. Those claims will be paid in full, insurers say, but further events might strain resources — especially without the support of international reinsurers, which are likely to pull terror cover from next 2002 policies.
The insurers’ plan does face opposition in Congress, where some are not yet convinced of the need for federal support of the insurance industry.
Under the insurers’ proposals, the government would set up Homeland Security Mutual Reinsurance Co., a mutual reinsurer that would itself be reinsured by the U.S. government.
Primary insurers, such as Hartford, American International Group Inc. and Allstate Corp., would continue to offer policies that include coverage for damage from terror attacks, but the portion of the premium assigned to terror risk would be passed on to Homeland. That company would then gather the forwarded premiums and use that money to pay claims in the event of future terror incidents.
Under the insurers’ plan, the federal government would pay 100 percent of terror losses for the first year of Homeland’s existence, irrespective of Homeland’s surplus level, to give it time to build up capital.
Following that, the new company would pay out claims until 80 percent of its capital and surplus was spent, with the federal government picking up the remaining tab.
The government would continue backing the pool in the form of free reinsurance until the pool built up $10 billion in capital, the insurers’ proposed. After that, Homeland would have to pay the government for coverage.
It is likely that at that stage private reinsurers might reenter the market.
Insurers want the new company, to come under the supervision of Illinois insurance regulators, to be tax exempt, allowing it to accrue reserves more quickly by retaining all investment income.
According to the proposal, insurers would not share in any underwriting profits generated by the pool.
Insurers are now discussing the proposal with politicians, including Connecticut Democratic Sen. Chris Dodd — who is taking the lead in putting the legislation together — and are looking to introduce a bill into Congress next week.
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