Property casualty insurers have outlined what they term a “market-based” approach to providing terrorism risk insurance.
The proposals include repeal of some state laws on fire policies and creation of a national reinsurance pool that would grow as the government’ role in providing coverage shrinks.
Property Casualty Insurers Association of America President and CEO Ernie Csiszar unveiled the proposals for insuring terrorism risks that he said would protect the economy, promote private markets, and reduce taxpayer exposure to the costs of terrorism risks. Csiszar spoke before the House Committee on Financial Services.
PCI said its approach has been developed after eight months of deliberation by its Terrorism Risk Alternatives Task Force, and provides an array of potential options to insuring terrorism risk designed to increase private sector participation in the terrorism insurance marketplace.
Among its features, PCI’s blueprint calls for an end to the TRIA distinction between domestic and foreign terrorism and a continuation of the mandatory offer of terrorism insurance coverage to consumers. Consumers would not be required to buy the coverage but if they do not accept the mandatory offer, no coverage will be provided and no other federal assistance outside the program would be forthcoming after an attack.
PCI also urged Congress to encourage the development of a terrorism catastrophe bond market to bring new non-insurance capital into the market.
Also, the plan calls for the creation of a facility to allow insurers to share some of the additional risk assumed as federal support declines and provide individual insurers the voluntary option to reduce their own attachment point to some acceptable level.
PCI says the industry also needs greater rating freedom and repeal of the remaining 16 commercial Standard Fire Policy laws in the states.
The plan promises to reduce taxpayer exposure over time by means of a gradual increase in the individual company deductible – perhaps by one percent per year.
“National security and economic security are two sides of the same coin,” Csiszar told the House committee members. “Without federal participation, terrorism is an unpredictable and uninsurable risk that threatens the solvency of the insurance industry and the stability of the nation’s economy. And while there is no ‘perfect’ solution to this complex problem, this does not mean that insurers and the federal government can’t create an effective public/private partnership that protects our economy and our citizens from the financial devastation of a terrorist attack.”
PCI’s approach focuses on bringing additional capacity to the terrorism insurance marketplace by employing private market tools coupled with the certainty provided by high level federal government financial backing. PCI said the solution would spur insurers to enter the market, enable insurers to share or “buy down” their risk, and allow for the development of a catastrophe bonds market and similar facilities that would encourage greater private capital participation in the market.
“Most importantly, a market-based approach means that Congress would not have to continually revisit this issue, providing the business community and the insurance industry with the certainty of financial security, which will foster job creation and economic growth,” said Csiszar. “If we are to ensure the long-term stability of our economy we need to address the long-term economic security problem that terrorism poses.”
The hearing focused on potential solutions to the problem of the looming expiration of the Terrorism Risk Insurance Act on December 31.
Csiszar also pointed out several concerns with a short-term extension of a modified version of TRIA. “The threat of terrorism is not likely to subside within two years and without incentives in place the private market alone is not likely to be able to fill the gaps in coverage that will be left without federal government participation. It is extraordinarily important that this issue is addressed this year. Without an effective replacement for TRIA the economy will suffer.”
PCI is composed of more than 1,000 member companies writing more than $173 billion in annual premium, 39.4 percent of the nation’s property/casualty insurance.
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