If Congress adjourns without reaching a final agreement on
terrorism reinsurance legislation, insurance markets for such coverage will continue to be plagued by availability and affordability issues, particularly for commercial property, workers’ compensation and group life markets, according to the National Association of Independent Insurers (NAII). Although the markets have improved in recent months, the need for an effective federal terrorism reinsurance program remains, according to the NAII.
“The vast majority of insurers are small and mid-sized companies, and without the passage of an effective federal program including per-company retention and avoiding cross subsidies, these companies will be unable to fully participate in the market,” Julie Gackenbach, NAII vice president of government relations, said. “More importantly, consumers will be left with fewer, higher priced insurance choices, and in some cases may not be able to secure coverage at any price.”
NAII said it supports the enactment of an effective and equitable federal program that avoids cross-subsidies by either type of insurance company or line of coverage and provides for a per-company retention level to permit smaller and mid-sized companies to fully participate in the program.
“A federal program should encompass all commercial lines, including workers’ compensation,” Gackenbach remarked. “Additionally, coverage under the program for personal lines and group life should be available on a voluntary basis on the same terms and conditions as provided for commercial lines.”
NAII has repeatedly cautioned federal legislators that the imposition of policyholder surcharges to repay federal funds has the potential to create inequitable cross-subsidies. Across-the-board surcharges could impose increased costs on small businesses in rural America, regardless of where the actual terrorism event occurred and, in all likelihood, regardless of the actual exposure to terrorism risks. In addition, many commercial lines, such as professional liability, are not subject to terrorism risk. Likewise, some lines are more exposed to such loss than others.
“The House bill recognized the potential inequities of surcharges and
included language requiring the consideration of “the risk factors related to rural areas and smaller commercial centers, including the potential exposure to loss and the likely magnitude of such loss, as well as any resulting cross-subsidization that might result; and the various exposures to terrorism risk for different lines of commercial property and casualty insurance,” Gackenbach commented. “It is imperative for NAII member companies that Congress include such language limiting the cross-subsidization inherent in policyholder
Inclusion of a reasonable participating company deductible is also essential to the viability of the federal backstop, according to NAII. Without such a provision, the ability of small and mid-sized companies to financially absorb a major terrorism loss would be eliminated.
NAII is calling on Congress to address the critical issues of termination of the federal program and the need for business interruption coverage. “The short-term nature of the federal backstop necessitates inclusion of an end point for federal participation,” Gackenbach said. “However, the hard cut-off
date included in the House and Senate bills poses significant issues for in-force policies due to expire beyond the expiration date of the federal program.”
The House and Senate bills both provide for a federal backstop of business interruption coverage; however, the definitions of “business interruption coverage” differ from that used in most insurer coverage forms. NAII urges the conference committee to track the definition of business interruption coverage in the conference report to the language included in existing property/casualty contracts.
“NAII stands ready to work with congress to resolve the remaining differences and address these technical issues. On behalf of our member companies and their policyholders, we urge Congress to address these critical issues,” Carl Parks, senior vice president of government relations, added.
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