AAI Defends Federal Terror Bill in Letter to Editor

October 29, 2002

David Farmer, senior vice president of federal affairs for the Alliance of American Insurers, issued the following letter to the editor published in the Oct. 27 edition of the Washington (DC) Times newspaper. In it, he refutes the paper’s editorial conclusion that the current agreement on a federal terrorism insurance backstop is bad.

Dear Editor:

Thursday’s editorial on the terrorism insurance legislation before Congress (“A bad terrorism-insurance bill”) reflects an unfortunate view on the matter. The Alliance of American Insurers, which represents the interests of 340 property/casualty insurers from around the country, believes the editorial reaches the wrong conclusion.

First, the facts. The insurance industry needs the federal government to assume a substantial role in insurance markets that have been affected worldwide by a variety of factors – most notably the events of Sept. 11, 2001, but additionally a brutally competitive market, a substantial reduction in investment income, and the global nature of the industry all come into play. Tragic events such as the recent attack on an oil tanker in the Persian Gulf and the nightclub bombing in Bali, Indonesia, impact the global reinsurance market and point out the possibility of terrorist attacks. Knowledgeable investment analysts also stress the importance of the legislation. As Alice Schroeder of Morgan Stanley opined recently: “We view eventual passage [of terrorism insurance] as imperative.”

The bill is neither a subsidy nor a key to the federal Treasury for the trial bar. The retention levels on this bill are very high for insurers. For a large company that writes $4 billion in premiums, the retention is $280 million in the first year; in the third year, it rises to 15 percent of $4 billion, or $600 million. There is a payback provision in the legislation as well. Moreover, we do not believe terrorism insurance is the only legislative vehicle for addressing tort-reform issues. While limiting excessive punitive damages remains a worthy goal, we believe this bill – which would consolidate cases in federal courts – is workable. Furthermore, the retention levels required in the legislation will protect American taxpayers in a significant way.

Most important, the peril of terrorism except in selected coverages (marine, aviation, political risk) is not capable of being underwritten across the broad coverages in the property and casualty industry. It is more akin to flood insurance, currently provided almost exclusively by the federal government through the federal flood insurance program. This bill creates partnerships that benefit everyone.

President Bush wisely supports this legislation as a way to assist insurers, contractors, real estate developers and small businesses all across America in helping to protect their workers. The bill also will help businesses obtain financing and will grow an economy teetering on the edge of a double-dip recession.

Perfection should not be a stumbling block in passing this bill. Congress should pass this legislation when it returns to work Nov. 12 to move our economy forward.

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