In testimony today before the Senate Banking Committee, Ernie Csiszar, president and chief executive officer of the Property Casualty Insurers Association of America, outlined possible components of a long-term terrorism insurance solution and urged Congress to act quickly on such a proposal to ensure economic stability and continued viability of the nation’s fledgling terrorism insurance market.
“Our members believe in the power of free markets and support competition-driven solutions to public policy problems,” said Csiszar. “But there are some instances – terrorism insurance being one – where only a public/private partnership can marshal the resources to effectively protect individual consumers and our nation’s economic security.”
Csiszar stated that the three primary obstacles to creating an effective and efficient terrorism insurance market are the inability to accurately underwrite and price such risks, the lack of sufficient financial capacity in the industry, and regulatory impediments in certain markets.
“Since enactment of TRIA in 2002, the insurance industry has worked hard to create effective terrorism insurance markets,” said Csiszar. “But the unknown size and frequency of terrorism losses make it virtually impossible to develop accurate risk models. The industry has also been working over the past three years to develop terrorism risk models and analyze the implications of future attacks. Despite their infancy, these models indicate that a loss of $100 billion or more is not far-fetched. This would easily exceed the financial capacity of the industry.”
In outlining the components of a long-term solution to the financing terrorism risks Csiszar urged legislators to consider a variety of alternatives that would enhance the private market for terrorism insurance. Such components might include federal support for allowing insurers greater flexibility to negotiate coverage terms and conditions; creating a mechanism that would allow insurers to reduce their individual exposure to terrorism losses; tapping capital markets to generate additional capacity; and enabling insurers to form tax-exempt entities or allowing them to accumulate reserves for catastrophic losses.
In particular, Csiszar called on lawmakers to realize that losses from the use of weapons of mass destruction are not insurable by the private marketplace.
“The federal government must be fully involved in dealing with these losses on both commercial policies, which are currently addressed by TRIA, and personal policies such as homeowners and automobile insurance policies, which are not,” said Csiszar. “Any bill addressing a long-term solution to the terrorism insurance issue – including one that would extend TRIA – should at least examine the impact of weapons of mass destruction losses across all lines of insurance.”
Csiszar said that a variety of state laws tightly regulate the insurance markets limiting the ability of markets to respond freely to this issue and that TRIA also allows states to control the rates insurers can charge for terrorism coverage. He also said that no state allows workers compensation insurers to exclude or limit coverage for losses caused by terrorism.
“If solutions are to be based on market principles, then the market must be allowed to work,” said Csiszar. If TRIA is allowed to expire without reforms that allow insurers more flexibility in negotiating coverage terms and conditions some insurers will be forced to consider leaving particular markets.
“We would like to be able to present you with one plan that will provide the definitive long-term solution to the terrorism insurance problem,” said Csiszar. “But such a solution is not likely to come neatly wrapped in a single container. There are many moving parts that have to be analyzed by Congress and assembled by the industry. Every day we delay action adds more uncertainty for both insurers and insurance buyers. There is an economic consequence to this sense of uncertainty. We want to work with Congress and the White House to develop a public/private partnership that protects individual consumers and the integrity of our economy.”
PCI members write $173.6 billion in annual premium, 39.1 percent of the nation’s property/casualty insurance.
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