U.S. RE Takes Lead on Public/Private Facility for Terrorism Reinsurance

October 28, 2005

While backers of an extension of the federal terrorism reinsurance program are still hoping that at least a short term fix will be approved before the Terrorism Risk Insurance Act officially expires at year’s end, others are looking ahead at what a long term solution might be.

The U.S. RE Group is advocating a governmental-private sector reinsurance facility to provide a long-term replacement for the federal Terrorism Risk Insurance Act.

“We strongly support extension of the present program to allow time to forge an industry-government consensus on a long-term solution. We are now approaching industry leaders and trade association executives with a proposal to create a Terrorism Risk Reinsurance Facility to facilitate discussion that would by objective create a workable partnership between government and industry,” Tal P. Piccione, U.S. RE’s chairman and chef executive officer, said.

Piccione said that his firm was asked last year by the Treasury Department for advice on an alternative format to the existing program in anticipation of its sunset provision. The Treasury Department, along with other governmental leaders, hopes to see a workable plan developed to replace the current program and recently permitted U.S. RE to release the details of the work undertaken thus far to the American Insurance Association and other constituents in the industry, he explained.

Meetings began with AIA and will expand to include other groups in coming weeks.

“We are finding a receptive attitude toward achieving an industry-government partnership. Financing the coverage requires a government backstop because it is impossible to predict the frequency and severity of potential terrorism events,” Piccione maintained.

The Terrorism Risk Reinsurance Facility (TRRF) proposed by U.S. RE would be a tax-exempt, quasi-governmental entity to pay terrorism losses in excess of individual company retentions for all commercial lines up to a maximum industry loss of $45 billion in any year. Industry retentions would be pegged at 15 percent of prior year commercial premiums, or about $30 billion. This would provide up to an estimated $75 billion of terrorism coverage per year.

Funding for TRRF would be provided by insurance companies through payment of a percentage of commercial lines premiums annually. In the event that an act of terrorism occurs before the fund is capable of paying the losses, the federal government would lend the facility money to cover the shortfall until the fund builds up.

Companies participating in TRRF could surcharge policyholders up to a percentage of direct earned premiums per year to pay off any shortfall obligations. Premiums paid into the facility would be deductible as a reinsurance expense. Insurers paying into the facility would concurrently be issued equity in the reinsuring entity in return for their contributions over the years. “In effect, insurers would be using pre-tax dollars to fund the limit while at the same time being able to assetize their contributions in their financial statements,” Piccione stated.

Piccione said comments and suggestions are welcome. Details of the TRRF proposal are available on U.S. RE’s website, www.usre.com.

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