Regulators Hear Industry’s Cautions on Mixing Terrorism Risk and Natural Disasters in CAT Plan

May 8, 2002

A National Association of Insurance Commissioners (NAIC) committee wanting to add terrorism risk to an existing plan for catastrophe reserving has agreed to slow down after the National Association of Mutual Insurance Companies (NAMIC) and other trades asserted that a federal backstop was the only appropriate measure.

Three other property-casualty trade associations and the Reinsurance Association of America joined NAMIC in a letter and in oral comments recently to the NAIC’s Catastrophe Reserving subgroup, that adding terrorism to the currently inoperative catastrophe reserving made little “insurance” sense and also risked giving Congress a reason not to act on legislation to provide the industry with a terrorist backstop.

“The regulators agreed to go slow and give deference to Congress’s potential actions on terrorism legislation,” William Boyd, NAMIC’s financial regulation manager, commented.

The NAIC’s catastrophe-reserving plan, formulated originally to provide pre-event reserving for natural disasters, is currently on the shelf because of concerted industry effort to keep it dormant until Congress amends the tax code to provide deductibility for such pre-event reserving.

The regulators apparently believed that adding terrorism risk to the catastrophe-reserving plan would make the plan more viable and entice Congress to grant deductibility for the whole package.

“Their efforts are well intended, but this is not the right way to cover terrorism risk or get the catastrophe-reserving plan moving as far as the tax status of pre-event reserving,” Boyd said, of the subgroup’s efforts.

The industry letter said, among other caveats, that true risk transfer, rather than a reserving plan was needed for terrorism risk: If incorporated in the catastrophe-reserving plan, terrorism risk would remain with the reserving company. The industry’s goal after the events of Sept. 11, 2001 has been partial retention by the industry with a federal backstop for claims resulting from huge terrorist deeds. Many knowledgeable observers say that terrorism risk is simply uninsurable because it cannot be quantified.

Further, the industry letter said incorporation of terrorism risk into the NAIC catastrophe-reserving plan might give Congress an excuse not to provide a federal backstop.

The subgroup, chaired by Fla. regulator Kay Cleary, decided to give Congress more time to act, although the subgroup may later gather data and refine the plan.

The Alliance of American Insurers, the American Insurance Association, and the National Association of Independent Insurers also signed the letter.

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