S&P’s: Federal Terrorism Coverage a Concern for Insurer Ratings

October 22, 2002

The introduction of federal terrorism coverage could tempt some insurers into taking on exposure irresponsibly and have the perverse effect of casting doubt on ratings, according to a Standard & Poor’s report.

“The concern is some insurers could use federal backing as a crutch,” Fred Loeloff, a director in Standard & Poor’s insurance ratings, remarked. “From a ratings perspective, you need to have confidence in the exposure-management capabilities of the insurer, that it can properly assess and manage its risks, without depending on government backing.”

Reportedly, although there is a compelling case for government-backstop legislation to ease constraints in the U.S. economy, its importance to insurers has diminished in the past year because carriers have drastically reduced their exposure to terror events.

Another concern is that those states which now permit insurers to exclude terrorism from policy contracts, could reverse themselves and require the coverage.

“Our sensitivities will be increased because companies will, either by
mandate or voluntarily, be exposed to terrorism risk,” Steve Dreyer, managing director, warned.

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