AAI Says Consumer Group’s Claim Is Misleading

May 31, 2002

The Alliance of American Insurers (AAI) says that a recent letter on terrorism insurance sent by the Consumer Federation of America (CFA) to Senate Majority Leader Tom Daschle cited incomplete statistics and was misleading in its conclusions.

“The CFA has inaccurately characterized the insurance marketplace as rebounding from the September 11th attack,” Alliance President Rodger Lawson commented. “In fact, the uncertainty of the situation has created shortages and pricing issues for terrorism insurance. A federal backstop is necessary to return stability to the market and protect our economy.

“While 18 governors, numerous elected officials, and the National Association of Insurance Commissioners (NAIC) have all recognized the need for a federal backstop, the CFA continues to ignore what’s happening in the real world.”

In the letter, CFA Director of Insurance J. Robert Hunter says that banks are freely loaning money and that most large businesses have found terrorism coverage. According to a Joint Economic Committee report issued this month, this is largely not the case. The JEC report cites the following examples to the contrary:

A bank in New York held up a 30 story residential building because of a lack of terrorism insurance.

A residential real estate deal worth $300 million was canceled because the cost of terrorism insurance alone was $6 million.

A $200 million New York City trophy building project was canceled because the builder could not find terrorism insurance as required by the lenders.

A $2 billion Las Vegas project was canceled because the builder could not find terrorism insurance as required by the lenders.

Fleet Bank put two large loans on hold due to lack of terrorism insurance.

The Bond Market Association found that $7 billion or 10 percent of commercial real estate loan activity has been suspended or canceled because of a lack of terrorism insurance.

Alliance Associate Vice President of Research Roger Kenney remarked, “Even Bob Hunter admits that only seven carriers are now providing any terrorism insurance at all, while scores of them offered the coverage before Sept. 11. What he does not say is that the amount of coverage offered is extremely small compared to the need. According to the JEC, terrorism coverage limits of $75 to $100 million per insurer are available. But we’re talking about buildings valued in the hundreds of millions, or billions of dollars. The limited coverage that may be available at extremely high rates doesn’t provide much protection.”

The CFA letter also claimed that insurers are in better financial shape than before Sept. 11. “As of year-end 2001, insurer surplus (the money insurers use to pay unexpected claims, including the Sept. 11 losses) was more than $27 billion less than it was as of year-end 2000,” Kenney commented. “Further, this year-end 2001 figure includes some of the $25 billion Hunter says has ‘poured’ into the industry since Sept. 11.

“The new capital coming into the market is not being invested in U.S. insurance companies. It’s going into offshore reinsurance companies and they are largely not committing that money to provide terrorism coverage for primary insurers.

“As to the larger point, the insurance industry is not better off now than before Sept. 11,” Lawson remarked. “In fact, its financial position is significantly worse. No one knows at this time what the total amount of claims will amount to, but current estimates from reliable sources like A.M Best indicate that the industry surplus—the amount set aside to pay such claims—has declined by over $27 billion, or nine percent over December of 2000, and will continue to decline when all losses are paid.

“Insurance consumers, as much as insurance companies, need Congress to act. Take a look at what’s happening in the area of workers compensation insurance and you can see that the lack of terrorism reinsurance is a concern to the average working American. The ongoing threat of terrorism, which our nation’s leaders have just reminded us of, means that federal action is essential to stabilize the market.”

The Alliance wrote to the Senate Majority and Minority Leaders last week to again urge passage of terrorism insurance legislation, following government officials’ renewed predictions of additional attacks. Terrorism insurance legislation was passed by the U.S. House of Representatives in the fall of 2001.

The Senate has yet to bring similar legislation to a vote, although a number of bills have been introduced and discussions are ongoing.

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