Regulators Should be Deliberate, Flexible When Considering Personal Lines Terrorism Exclusions

January 18, 2002

The National Association of Independent Insurers (NAII) has urged insurance regulators to “move with deliberation…on terrorism exclusions for personal lines” and to remain flexible when considering such exclusions.

According to NAII, reinsurance contracts for many personal lines insurers now contain broad exclusions for terrorism risks, leaving primary insurers with little option but to invoke similar exclusions or significantly increase premiums to cover potential losses from a future terrorist attack.

NAII is in the process of collecting additional data from its members, who write more than 43 percent of the nation’s total personal lines market, to definitely document the extent of the problem to individual state regulators and the National Association of Insurance Commissioners (NAIC).

In a letter to NAIC President and Iowa Insurance Commissioner Terri Vaughan and Montana Insurance Commissioner John Morrison, chairman of the NAIC Legal Issues Ad Hoc Group, NAII urged the NAIC “not to rush to judgment regarding terrorism exclusions for personal lines and to allow sufficient time for input prior to any decision.”

The NAIC Reinsurance Task Force conducted a hearing earlier in the week in Washington, D.C. to assess the availability and affordability of reinsurance coverage in the wake of the Sept. 11 catastrophe.

“While most regulators, legislators and commercial lines consumers understand the effect that the World Trade Center disaster had on business insurance costs, the real impact of terrorism for personal lines remains unknown at this time,” said Robert L. Zeman, NAII vice president and assistant general counsel. “Insurance is a data driven industry and it has been less than three weeks since the January 1, 2002 reinsurance contract renewals — not enough time to collect or analyze the statistical information on the how the terrorist attacks are affecting the personal lines market. However, anecdotal information compiled from our member companies gives a clear indication that many personal lines insurers are concerned about the lack of reinsurance availability.”

Zeman cited language added to reinsurance contracts that specifically excludes personal lines terrorism risks. “The exclusion language we have seen is very broad and significantly increases personal lines companies’ uninsured exposure to catastrophic risks arising out of future terrorist attacks,” Zeman said. “As such, we would suggest that NAIC and individual state regulators at least consider personal lines exclusions on a case-by-case basis for insurers that demonstrate to the insurance department potential solvency problems stemming from the lack of reinsurance.

“The NAIC should use the January 17 Reinsurance Task Force hearing as the beginning of its study on this important topic.”

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