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TERRORISM INSURANCE

(Current as of February 2003)

THE ISSUE IS: Implementation of the Terrorism Risk Insurance Act of 2002.

IT'S IMPORTANT BECAUSE: Due to the tragic events of September 11 - and the possibility of further acts - Congress recognized the need to establish new mechanisms to assure the financial capacity to pay claims resulting from terrorism in the future.

The September 11 attacks were of a nature and scope unlike any other catastrophe in world history. Prior to September 11, insurance and reinsurance companies did not collect premiums to cover terrorism. There is no way to predict how, when and where future terrorist attacks against the United States will be launched. Under these circumstances, insurers (including reinsurers), cannot assess, measure, or spread the risk resulting from acts of terrorism.

The property/casualty insurance industry is wisely managed and is well-capitalized overall. But the industry cannot be expected to absorb unlimited losses from multiple terrorist attacks in the future while maintaining the financial strength to pay claims for auto accidents, fires, natural disasters, workplace injuries and other hazards.

Since September 11, reinsurers have generally excluded terrorism from treaties negotiated with primary insurance companies. This leaves those companies with the added exposure of terrorism for which they have not collected premiums. In the cases where primary insurers have been approved by their regulators to exclude terrorism, the policyholders are left with the exposure of terrorism. When primary insurers or policyholders have been able to obtain terrorism coverage, it is extremely limited and expensive. The lack of available and affordable coverage for terrorism leaves the policyholders with either limited coverage or no coverage at all.

Congress acted to address this situation late in the 107th Congress with the passage of H.R. 3210, the Terrorism Risk Insurance Act, which creates a federal backstop for insurance against terrorism. President Bush signed this important bill on November 26, 2002, and it became Public Law No. 107-297. The new law creates a mechanism under which the federal government would provide direct assistance to insurers in the event of a catastrophic terrorist attack. The program took effect immediately upon being signed and will automatically last through December 31, 2004. The U.S. Secretary of the Treasury may extend it through December 31, 2005.

The backstop mechanism, which only applies to commercial insurance and is mandatory, would be triggered for an attack officially declared by the U.S. Attorney General and the Secretary of State to be an act of terrorism and causing at least $5 million in aggregate losses. The federal government would pay 90 percent of the losses, and insurers would pay 10 percent of the amount above their deductibles. Individual company deductibles are 7 percent of direct earned premium in 2003, 10 percent in 2004 and 15 percent in 2005. A payback mechanism, not to exceed three percent of an insurer's premium, is established for participating insurers if an event results in losses less than $10 billion in 2003, $12.5 billion in 2004, and $15 billion in 2005. There is a $100 billion aggregate limit on federal assistance. If losses exceed this amount, the Treasury Secretary must report this to Congress.

NAMIC POSITION: NAMIC believes that a federal backstop for terrorism reinsurance is necessary and is pleased that the Terrorism Risk Insurance Act has been enacted into law. This new law should help to stabilize the commercial insurance and reinsurance marketplace and will provide financial protection from terrorist attacks to commercial policyholders. NAMIC was disappointed that personal lines were not included in the program on an optional basis, but the association is pleased that the law requires the Treasury Department to conduct a study on the inclusion of personal lines. NAMIC is working with the Treasury Department and the National Association of Insurance Commissioners on implementation issues to facilitate the participation and compliance of the membership.

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