NAII Urges Terrorism Exclusions for Personal, Commercial Lines

January 30, 2002

The National Association of Independent Insurers (NAII) is urging state insurance regulators to consider personal lines exclusions on a case-by-case basis for insurers that demonstrate the potential for solvency problems stemming from a lack of reinsurance.

Absent the proposed federal backstop reinsurance legislation, insurers caution that losses from Sept. 11 and a hardening market have dried up the availability of reinsurance for both commercial and personal lines.

“Personal lines and “main-street” commercial lines insurers, as well as small and medium-sized insurance companies, may or may not be able to appropriately spread terrorism risks without the assistance of reinsurance,” explained Robert Zeman, NAII vice president and assistant general counsel, in a letter to Georgia Insurance Commissioner John W. Oxendine. “Insurers of small businesses in Iowa or homes in Kansas City are all at risk and may not be able to absorb the $25 million loss before the exclusionary wording contained in the ISO endorsements is activated without adequate reinsurance or a workable federal reinsurance backstop.

“We would urge the National Association of Insurance Commissioners (NAIC) not to determine its position this week on the use of exclusions based on whether or not an insurance company utilizes reinsurance or whether or not it is available, but on the potential risk of loss due to terrorism to each company for a particular risk, line of business or state.”

Zeman encouraged the NAIC to support the ability of insurance companies to use reasonable exclusionary language or endorsements in “all states and in all lines” since terrorists acts are random and could occur in any state, town or village in the U.S.

“Although we have not had another terrorism attack and hope that such attack will not occur, it will only be at that time, in the absence of a federal backstop, without the availability of affordable terrorism reinsurance and without the ability to exclude this coverage that the impact of such an event will become measurable,” Zeman said.

Businesses and individuals without coverage will sustain significant losses and insurers when forced to provide coverage without the ability to spread this risk could, in some cases, become insolvent, Zeman added.

“Like it or not, while terrorism losses may or may not be insurable, determining the appropriate cost, terms of coverage and the financial impact of the losses is not feasible, at least at this time,” Zeman said.

In its letter to Oxendine, NAII also encouraged the NAIC to work with the industry and Congress to address the short-term insurance market instability with reasonable market-based solutions, such as the backstop reinsurance bill proposed in December 2001 before Congress adjourned.

“Short term solutions are needed to protect the industry, the public and our nation over the long-term when disasters of extraordinary magnitude occur,” Zeman said.

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