Consumer Federation’s Terrorism Insurance Plan Based on ‘Wishful Thinking’

October 26, 2001

A proposal to establish a federal terrorism reinsurance program offered by the Consumer Federation of America (CFA) is based on faulty assumptions and wishful thinking, according to the National Association of Independent Insurers (NAII).

“The CFA’s proposal assumes that the insurance industry could withstand another catastrophic hit of $35 billion or more and remain viable and solvent,” said Carl Parks, NAII senior vice president, government affairs. “It’s not clear how CFA arrived at this conclusion, but we disagree with it.

“The industry is capable of paying all covered claims resulting from the September 11th attacks. But coverage for future terrorist losses is in jeopardy because it is currently impossible to quantify and price the risk. Before the attacks, the industry had about $300 billion in capital. Nearly $100 billion of that capital was concentrated with the insurers with the greatest loss exposure to the World Trade Center catastrophe. If total claims from the disaster reach the high end of the predicted losses, it’s clear that the solvency of those firms will be directly threatened and reinsurance for all other insurance companies may be unavailable.”

Parks explained that other business groups have said that whole segments of our economy would be negatively affected without immediate federal action to alleviate the terrorism insurance crisis.

“The ability to buy or sell properties across the nation may be at risk if insurance becomes limited or unavailable,” Parks said. “The industry, Congress and the Bush Administration are working together to create a realistic terrorism reinsurance backstop plan. Unfortunately, CFA’s proposal, although well intentioned, is contradictory and has several serious flaws.

“In its proposal CFA said that territorial differences in rating would be unfair because ‘New York City will likely pay much higher rates than other cities.’ In the same CFA testimony at the National Association of Insurance Commissioners’ (NAIC) Washington Summit, it recommended that “pricing should be actuarially sound.”

“You can’t have it both ways,” said Parks. “Most consumers would agree that the price of terrorist insurance coverage for a building in a small rural town versus one in a major metropolis should be different based upon the risks involved. Unprecedented, random terrorist attacks will be difficult enough to rate, but to exclude the location of the properties from the equation would be unfair. Without the ability to base rates on the risk involved, including territorial considerations, the premiums can not be actuarially sound.”

According to Parks, the CFA proposal would require insurers to apply for federal low or no interest loans to be repaid over a 30-year period with the discounted value of the loan limited to additional 5 percent of the surplus of the insurer.

“Such loans, which would be repaid by the industry and ultimately the policyholder, would not take into account that individuals in certain areas of the country are less impacted than others and that commercial insurers bear more risk than personal lines insurers,” Parks explained. “How fair is a program based on the premise that everyone pays the same–no matter where they are on the risk line?”

Unlike the CFA proposal, Parks said that all industry and administration proposals consider a sunset provision. The advantage of a sunset provision is that it requires Congress to review a program by a specific date to determine if the program is still needed.

Parks also explained that CFA’s comparison of the Riot Reinsurance Program of 30 years ago to its proposal on terrorist reinsurance coverage today is unrealistic. “There isn’t a reasonable comparison to be made when looking back at fire and vandalism property losses in urban areas during the ’70s and the risks of terrorist threats we now face today,” Parks said. “It’s wishful thinking to believe that yesterday’s attempted remedies are appropriate now.”

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