IIC Award-Winner Warns: Terrorism Cover No Panacea, U.S. Regulation Out of Step

By | May 3, 2002

New York—The insurance business needs help in the form of terrorism coverage, but it’s no panacea, warns Robert V. Mendelsohn, the American Chief Executive of London-based Royal & Sun Alliance Insurance Group.

Among the lessons of Sept. 11 is that “there are some events in the world that insurance just isn’t suited to handle,” he remarked at the annual International Insurance Day Luncheon here.

“We’re great at natural catastrophes. We proved on 9-11 we can be pretty good on man-made catastrophes—but man-made catastrophes were not what this business was designed to handle, so we need help. We do need terrorism coverage, some insurer of last resort to provide the financial backing to make sure the system works when the next 9-11 happens.”

He cautioned, however, about being “seduced” by the bills now running through Congress. If they pass, and 9-11 happens again tomorrow, what impact would these measures have on insurance financial statements? “Guess what? Not a lot,” he said. “Our loss would not be all that different than our loss then, and we’ve said as an industry that we can’t take another 9-11, that another event would send many companies over the edge.”

Industry players need to “make sure we understand the risks we are taking, make sure our state regulators, who are responsible for the solvency and health of our industry, understand that the terrorism exclusions as proposed are still important whether or not there is a federal bill,” he said. “A federal bill doesn’t take away the need for companies around the country to have protection. So we can’t get too carried away.”

Mendelsohn made his comments after receiving the International Insurance Award for distinguished service to the international insurance and reinsurance industry from the Internatiobnal Insurance Council, sponsor of the event.

He also spoke to the group of a “need for even wider and deeper markets” post 9-11, of a need to liberalize and open markets “so that we as an international industry can respond the next time we have to respond.”

He said the international insurance business is well on its way toward developing a framework for worldwide insurance standards for insurance supervision in both developed and developing countries.

The U.S. system, however, is viewed elsewhere as “fundamentally inconsistent with what the world thinks a regulatory scheme should look like.” In fact, he said, many Europeans regard the U.S. as a “developing country” in terms of the international insurance supervision issue. “They don’t think we have free and open markets for financial services in this country. They do see state regulation as a fundamental barrier to trade.”

“In the world’s view,” he said, “the United States insurance industry is not operating in an open market.”

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