NAMIC Speaks Before Treasury Department’s President’s Working Group - Outlines NAMIC TRIA Statements of Principles

WASHINGTON (July 25, 2006)—The National Association of Mutual Insurance Companies (NAMIC) spoke last Friday before the Presidential Working Group on Financial Services (President’s Working Group) at the Department of Treasury to come up with a long term public/private partnership to address the long-term availability and affordability of terrorism risk insurance.

“We greatly appreciated being invited to share our views before the Presidential Working Group,” said Justin A. Roth, NAMIC federal affairs senior director. “Terrorism is an ongoing threat to the people and government of the United States. Therefore, a long-term insurance industry program coupled with a government backstop at an appropriate level of loss is essential to assuring an orderly economic recovery and reconstruction effort after any significant terrorist attack.”

During the meeting, NAMIC laid out their position on the uninsurability of terrorism insurance and the need for a permanent terrorism risk program, one that would keep small and medium-sized insurers in the game by having a low trigger and reasonable deductible and retention levels.

“NAMIC offers a unique perspective on the need for a long-term solution to terrorism risk insurance as we represent some of the largest and smallest property/casualty insurance companies in the country,” stated Roth.

On December 22, 2005, President Bush signed into law the Terrorism Risk Insurance Extension Act of 2005, (TRIEA) which extends TRIA through December 31, 2007. The law extends the temporary federal Terrorism Insurance Program that provides for a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism. The Treasury Department implements the Program. The government backstop was established under the Terrorism Risk Insurance Act of 2002 (TRIA) and extended under TRIEA because there was, and still is, insufficient private sector terrorism insurance and reinsurance coverage to provide adequate coverage in the event of another large-scale terrorist attack.

NAMIC used this opportunity to outline its recently Board-approved three-tier solution “Statement of Principles on Terrorism Risk Insurance”:

1. The first layer would consist of private primary insurance and reinsurance, as exists under TRIEA, and would include the following elements:
• Small and medium-sized insurance carriers form the backbone of the industry and support niches of terrorism coverage larger carriers have historically avoided.
• A permanent event trigger should be set at a level that will continue to encourage participation by small and medium-sized insurers. Too high a trigger would drive them from the market because reinsurance costs would be too high, making primary coverage unaffordable.
• Individual company deductibles and the industry retention level should be tied to premium income, but set at levels that would enable the industry to continue to meet its other claims obligations and perform its economic role after paying off its share of the losses from a terrorist attack.
• State laws that (a) prohibit insurers from excluding terrorism and (b) prevent the free market from setting adequate rates for terrorism insurance should be preempted.
2. The second layer would be an industry-sponsored reinsurance facility to encourage the development of new private sector capital for terrorism. It would act as a bridge between the purely private sector layer and the private/public sector liquidity backstop in the third layer.
• Initially it might cover losses of about $10 billion to determine how much private sector capacity can be developed from the capital markets.
• U.S. companies eligible to access recoveries from this facility would fund the initial and ongoing capitalization through a policyholder surcharge.
• The facility should be authorized to purchase reinsurance protection.
• The facility would collect premiums and provide Industry Loss Warranty (ILW) reinsurance to insurers and reinsurers.
3. The third layer would be a private/public partnership that would provide a liquidity backstop in the wake of catastrophic terrorist events.
• Outlays would be recovered, in part, by a fixed annual policyholder surcharge.
• Aggregate annual financial protection would be provided for 90 percent of all eligible losses, losses beyond those covered by the first two tiers, up to $100 billion.

“A long term private/public terrorism insurance program is necessary because terrorism is fundamentally an uninsurable risk, due to the inability of insurers to predict when events will occur and because of the potentially catastrophic costs of an attack,” said Roth. “To be effective, a permanent terrorism program must allocate the costs of terrorism events between the private and public sector in a way that maximizes private sector involvement while assuring that private insurers can continue to meet their obligations across all economic sectors and insurance product lines after a terrorism event.”

“NAMIC will continue to work with the rest of the insurance industry, members of the House and Senate and the Department of Treasury to create a permanent public/private partnership on terrorism before the TRIA extension expires December 31, 2007,” said Roth.

For further information, contact
Georgiann Howell
(202) 628-1558
(202) 628-1601 Fax
ghowell@namic.org

Justin Roth
(202) 628-1558
(202 628-1601 Fax
jroth@namic.org

Posted: Tuesday, July 25, 2006 12:00:00 AM. Modified: Friday, September 22, 2006 10:23:28 AM.