WASHINGTON (June 21, 2007) — A proposal to extend the government’s involvement in terrorism insurance fits the bill – almost. That’s the message delivered to members of Congress by a representative for trade associations representing some 2,500 insurance companies.
Warren Heck, chairman and CEO of Greater New York Mutual Insurance Company, testified today before the House Financial Services’ Subcommittee on Capital Markets on behalf of the National Association of Mutual Insurance Companies (NAMIC) and the Property Casualty Insurers Association of America (PCI), as the panel considers a proposal to extend the Terrorism Risk Insurance Act.
The legislation, H.R. 2761, the Terrorism Risk Insurance Revision and Extension Act of 2007, includes several provisions endorsed by NAMIC and PCI. However, 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, the groups say.
“For all the good it has accomplished, the Terrorism Risk Insurance Act has been unable to do the impossible — to create a self-sustaining private market for what are fundamentally uninsurable events,” Heck said in written testimony, in voicing support for TRIA’s extension beyond its December expiration date. “When insurers have no historical track record of the frequency of particular events and a single such event could be large enough to wipe out much of the capital of the entire industry, then the only way insurers can responsibly write such a product is if the federal government defines insurers’ exposure.”
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.”
Several of the bill’s provisions go a long way toward helping these carriers, Heck said. They include:
One problem area in the bill for NAMIC and PCI is the mandate for insurers to include coverage for weapons of mass destruction, including nuclear, biological, chemical, and radiological attacks. Heck pointed out that 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.
“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. “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.”
Instead, Heck recommended that Congress establish a federal commission to study NBCR coverage issues. “NAMIC and PCI recommend that the mandate of the commission be expanded to study these and other complex legal, moral and practical issues of national import. Again, we understand and believe that this is a grave national issue that must be addressed, but we do not believe it can be resolved simply by adding a mandate that insurers provide such coverage to this legislation.”
Heck urged the lawmakers to establish a long-term terrorism insurance plan to maximize the ability of the country to recover from terrorists attacks.
“NAMIC, PCI and I firmly believe that if the Congress does not adopt a long-term private/public terrorism risk insurance program, many of our citizens who need terrorism coverage to operate their businesses all across the nation will be either unable to get insurance or unable to afford the little coverage that is available.” Heck testified. “The result, when the next terrorist attack occurs, will be more, not less, federal exposure because as sure as night follows the day, the federal government will pay for those losses.”
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Posted: Thursday, June 21, 2007 12:00:00 AM. Modified: Thursday, June 21, 2007 10:16:56 AM.
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