House Committee Advances Bill to Extend Terrorism Reinsurance Backstop for 15 Years

August 2, 2007

The House Financial Services Committee voted yesterday to extend and expand the federal terrorism reinsurance law, going against the wishes of the Bush Administration.

The panel voted by 49 to 20 in favor of H.R. 2761, the Terrorism Risk Insurance Revision and Extension Act of 2007 (TRIREA), which would extend the federal backstop for 15 years and expand it to include a controversial requirement that insurance companies make available coverage against nuclear, biological, chemical and radiological (NBCR) attacks, a provision not welcome by all insurers.

The new bill would also expand coverage to include attacks by domestic terrorists in addition to ones by foreigners as the existing law does.

The bill seeks to grow the private sector’s involvement in insuring against terrorism by lowering the event trigger. It reduces the amount of money an insurer must pay — to $50 million from $100 million — while maintaining deductibles and copayments at the present 20 percent levels.

Congress responded after the Sept. 11, 2001 attacks with the original Terrorism Risk Insurance Act of 2002 to help businesses having difficulty finding insurance for their properties and lives against terrorism-related losses. The program has been extended twice but is now set to expire on Dec. 31, 2007.

The Bush Administration has resisted attempts to continue and expand the government program, while the insurance industry has been supportive, arguing that the federal backstop is necessary for the private market to be able to insure properties in locations at high risk of a terrorist attack.

After yesterday’s House panel vote, Treasury Assistant Secretary for Financial Institutions David G. Nason expressed the Bush Administration’s objections to the House panel’s vote.

“The Administration has frequently stated the need for three critical elements in TRIA reauthorization: the program should remain temporary and short-term, with no expansion and a continued increase of private sector retention. Today’s effort to extend TRIA does not meet these standards for an improved market and we strongly oppose this bill,” he said in a statement.

“We are particularly disappointed with the committee’s decision to extend the program for 15 additional years. This extension runs counter to the public policy goal of reducing and eventually eliminating the federal government’s role in the terrorism insurance market, and it sends the wrong message to the marketplace for a program that was intended to be temporary.”

He said the Administration would work to change the bill as it moves through Congress.

Originally, the House version would have extended the program for 10 years but Rep. Peter King, R-N.Y., offered an amendment for a 15-year extension, which passed.

Rep. Barney Frank, D- Mass., a sponsor of the bill, has been a strong supporter of extending the program, as has his counterpart in the Senate for TREIA legislation, Sen. Chris Dodd, D-Conn., who chairs the Senate Banking Committee. Dodd has supported making the program permanent. Rep. Michael Capuano (D-Mass.) was the other House sponsor.

The bill must now pass a vote of the full House of Representatives, which will probably come next month. in September, before being sent to the Senate.

The Independent Insurance Agents & Brokers of America said it “strongly supports” the bill.

“We are encouraged by today’s action and hopeful that the program will be extended before its expiration at the end of the year, thereby bringing certainty to policyholders, insurers, and the insurance market as a whole. This legislation is crucial for the business customers of independent agents and brokers and for our nation’s economic security,” said Big “I” CEO Robert A. Rusbuldt.

Marc Racicot, president of the American Insurance Association, commended the committee for its bipartisan bote, calling it a “vital step to continuing America’s economic security.”

“The bipartisan spirit displayed in today’s committee vote bodes well for its chances on the floor,” stated Racicot. “I hope the bipartisanship can continue. It is absolutely critical that the Congress move swiftly to extend such a vital program.”

“This bill strikes an appropriate balance and addresses the needs of insurers – both big and small – and the needs of policyholders who collectively seek a workable means of providing this economic safety net,” stated Racicot.

Unless mandated by state law, coverage for NBCR risk has not been generally available, and reinsurance and “cat bond” capacity for NBCR attacks have been virtually non-existent. The bill recognizes the unique risks associated with a NBCR and redefines the federal reinsurance backstop to meet these challenges, according to the AIA.

Other insurers, while supporting the overall program, have expressed concerns about the approach to NBCR.

Warren Heck, chairman and CEO of Greater New York Mutual Insurance Co., testifying in June on behalf of the National Association of Mutual Insurance Companies (NAMIC) and the Property Casualty Insurers Association of America (PCI), warned that a requirement for insurers to offer coverage for attacks involving weapons of mass destruction could reduce the number of businesses that purchase terrorism insurance and would inhibit participation by many small- and medium-sized insurance companies.

Heck explained that smaller and medium-sized insurers, which comprise a large portion of NAMIC and PCI member companies, face substantial challenges because they “frequently operate within a single state or region or specialize in specific industries or markets. They lack the financial resources to withstand a terrorist attack in their home areas,” he said. “They cannot easily shift their business focus to other lines of insurance or to other parts of the country. In some instances, their only recourse might be to abandon a niche market they were created to serve, leaving commercial consumers with fewer choices.”

The mandate for insurers to include coverage for weapons of mass destruction, including NBCR attacks is of particular concern to these smaller and medium-sized carriers. According to Heck, reinsurers and the private capital markets, which don’t have to provide terrorism insurance, have little interest in covering terrorism risks in general, and virtually no appeal for assuming NBCR risks. That is the role of the fedral government, not private insurers, he argued.

“Attacks utilizing weapons of mass destruction (NBCR) are the ultimate in uninsurable events and they can have qualitatively different consequences than non-NBCR attacks,” Heck said. “Providing our citizens with financial protection against attacks using weapons of mass destruction is a fundamental duty of the federal government.”

Heck noted that reinsurance for NBCR coverage is largely unavailable to primary insurers.

“Rolling NBCR into terrorism coverage will likely result in significantly increased premiums and would likely have the unintended consequence of reducing the take-up rate for terrorism insurance,” he said. “Requiring any retention of NBCR risk by primary insurers (even where the federal program bears most of the risk) makes little sense if insurers cannot find private reinsurance and if we are unable to resolve a set of very serious operational concerns and issues.”

The Property Casualty Insurers Association of America had also warned that this requirement could potentially derail the legislation.

PCI argued that this NBCR could create high hurdles for the bill in the Senate and from the Bush Administration.

PCI and NAMIC support a provision to create a congressional commission to fully vet all possible alternatives and recommend a more feasible long-term solution to the NBCR problem.

“It would be most unfortunate to let the NBCR proposal sidetrack this much-needed legislation,” commented Ben McKay, PCI’s senior vice president, federal government relations.

In summary, the bill advanced by the House committe would:
Extend TRIA for 15 years with current co-paymentsand deductibles for conventional terrorism acts;

Expand TRIA’s “make available”requirement to include NBCR coverage;

Change TRIA’s definition of terrorism toinclude acts of domestic terrorism;

Set the program trigger at $50 million;

Add group life insurance to the lines ofinsurance for which terrorism coverage must be made available;

Decrease deductibles for terrorist attacks over$1 billion and decrease the trigger after such events; and,

Continue to require studies of the development ofa private market for terrorism risk insurance.

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