Insurance markets for terrorism coverage remain troubled
particularly for commercial property, workers’ compensation and group life markets, according to the National Association of Independent Insurers (NAII). Availability and affordability issues continue to exist.
Although the markets are improving, the NAII said the need for an effective federal terrorism reinsurance backstop remains.
On behalf of more than 715 member companies, NAII urged the Congress in a letter to complete action on this vital legislation prior to adjournment.
“NAII strongly supports a temporary federal terrorism reinsurance program that is simple in concept and administration, with the least amount of federal regulatory intervention. Any federal program should provide for a true risk-sharing mechanism in the short run until the industry market mechanisms can respond,” Carl Parks, senior vice president for government relations, said.
Critical issues stressed in the Sept. 23rd letter include:
*Cross-subsidies: An effective and equitable federal program should avoid cross-subsidies either by type of insurance company or by line of coverage and provide for a per-company retention level to permit smaller and mid-sized companies to fully participate in the program. Additionally, NAII supports the availability of coverage under the program for personal lines, workers’ compensation and group life coverages.
*Per-company retention levels: The inclusion of a participating company deductible is essential to the viability of the federal backstop. The vast majority of insurers are small and mid-sized companies writing under $100 million in commercial lines insurance annually. The ability of these small and mid-sized companies to financially absorb a major terrorism loss without a per-company deductible (e.g., through “hard” industry deductible) would be
eliminated. This would lead to greater market disruption, reduce competition and consumer choice, and provide an unfair advantage for some large, national insurers. The per-company deductible is also essential to avoid cross-subsidies by line of business or by insurer since companies would pay their share of the deductible based on their market penetration.
*Program termination: NAII supports a temporary short-term program designed to stabilize the market. Both the House and Senate bills envision the federal program terminating in one or two years unless extended. The short-term nature of the federal backstop necessitates inclusion of an end point for federal participation; however, a hard cut-off date poses significant issues for
in-force policies due to expire beyond the expiration date of the federal program. NAII strongly urges the Congress to provide for a limited “roll-off” period for outstanding policies – i.e., a continuation of the backstop until the expiration of such policies.
*Business interruption coverage: A critical element in the response to the terrorist events of Sept. 11 and likely to prove essential again in the event of another tragic incident. Business interruption coverage provides the lifeline for companies directly and indirectly impacted by catastrophic events. The definitions of “business interruption coverage” in the bills, however, differ from that used in most insurer coverage forms creating potential gaps in coverage for the victims of a terrorist act. NAII urged Congress to track the definition of
business interruption coverage in the conference report to the language included in existing property/casualty contracts.
*Consumer disclosures: The House and Senate bills both require disclosures of coverage and costs to policyholders. In a number of instances, insurers are not using exclusions or may not charge for terrorism coverage. Disclosures to policyholders indicating that the terms of their coverage remain the same and that the premium is unchanged would be costly and burdensome to insurers and confusing to consumers. NAII urges the conferees to amend the disclosure requirements to require notification only in cases where there is additional premium charged for covered losses. Targeting the notices would place the focus on the true intent of the provision, which is to allow consumers to make informed choices about the
purchase of terrorism coverage.
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