The political stalemate that resulted in Congress’ failure to implement a federal terrorism insurance backstop could stifle an economic recovery and shifts the pressure for handling such risks to state regulators. The federal government’s delay in addressing the issue leaves state insurance departments only a few days to approve or deny hundreds of requests by insurers to exclude terrorism losses from most commercial lines policies.
Despite the negative implications for many commercial lines consumers, most automobile and homeowners insurance consumer are not likely to be significantly affected by the lack of a federal terrorism insurance program. Some insurers may exclude terrorism losses from homeowners and auto insurance policies in some parts of the country, but most consumers will not see a significant impact on their rates or coverage.
“We are disappointed that Congress did not take decisive action on the terrorism insurance legislation,” said Jack Ramirez, president of the National Association of Independent Insurers (NAII). “This is more than just an insurance issue. This legislation affects several core segments of the economy. Real estate, banking, construction and manufacturing businesses will all have to shoulder the risk of terrorism exposures because they will no longer be able to transfer this risk to insurance companies. This will have a significant financial impact on those companies, and will have a trickle down effect on the entire economy.”
NAII pointed out that the legislation approved by the House and compromise language agreed to by leaders in the Senate met three of the Association’s key principles for any federal terrorism program. “The proposals that were on the table were simple, temporary in nature, and avoided cross-subsidies between types of insurers and product lines,” said Ramirez. “These were the three components most important to our members and their clients and we are pleased that congressional leaders incorporated them into the legislation.
“This bill was not stalled because of insurance issues,” said Ramirez. “Congress acknowledged that the potential size and unpredictability of terrorism risks make such exposures virtually uninsurable. The work done so far lays the groundwork for enacting a positive solution to the terrorism insurance problem early next year.”
In the interim, NAII expects that many companies involved in buying or selling landmark properties will have problems obtaining insurance coverage. In addition, oil and gas refineries and power plants of all kinds are also perceived to be vulnerable to terrorist attacks. Each insurance company will determine which policies it will write, cancel or non-renew based on the characteristics of each individual risk, the availability of reinsurance and the parameters of state regulation.
“This will be a true test of how well state regulation works,” said Robert L. Zeman, vice president and assistant general counsel of the NAII. “Thanks to the leadership exhibited by the National Association of Insurance Commissioners (NAIC) and several state insurance commissioners, we think that state regulators will be up to the task and will take the necessary steps to avoid any severe market disruptions.”
Because insurance companies cannot obtain reinsurance for terrorism risks for most commercial lines policies after January 1, 2001, many insurers have already filed terrorism exclusions with state regulators. Some states, including South Dakota, Massachusetts, Colorado and Idaho, are already allowing insurers to exclude terrorism coverage from most commercial lines policies.
Other states, including Washington and Connecticut, said that they would approve exclusions if Congress fails to establish a federal backstop. NAIC President and Iowa Insurance Commissioner Terri Vaughn last Tuesday said that if Congress fails to act, “state insurance regulators will be left with no choice but to begin approving some exclusions for commercial lines.”
“We are urging state insurance regulators to take a uniform, measured and reasonable approach to processing terrorism exclusions filed by insurers to avoid a regulatory hodgepodge that could further disrupt the insurance market and slow down economic recovery,” said Zeman.
Zeman said NAII’s primary concern is the narrow window of time Congress left for state regulators to take action on the terrorism exclusion filings. States will have only three working days to approve or deny these exclusions before January 1, when reinsurance for most commercial lines terrorism risks will no longer be available.
“By dragging out the debate over federal terrorism insurance legislation, the Senate could set the stage for a coverage continuity nightmare for consumers and insurers,” Zeman said. “That’s why it is so important for state regulators to reach a consensus on processing terrorism exclusion filings.”
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