The failure to renew the Terrorism Risk Insurance Act could cause sellers of insurance policies to abandon some markets, leaving buyers with no place to go for coverage required by law, industry experts warn.
"Underwriting organizations' reaction to a world without a federal government backstop is that they will just stop writing it," said Harry Tipper 3rd, president and CEO of Lyon's Gate Reinsurance Co. Ltd., this past October, addressing attendees of the annual meeting of the Self-Insurance Institute of America.
The absence of a government guarantee might cause other sellers--of workers' compensation insurance, for example--to tighten their terms or raise their prices to astronomical levels so as to be out of reach for nearly all commercial buyers.
Despite the "doomsday scenario," insurance industry leaders were confident that Congress would renew the law, perhaps in the form of a two-year extension.
The law requires the government to pay up to $100 billion in claims once the insurance industry reaches its claims-payment threshold.
Proponents of renewing the act say it's necessary to give the public markets confidence that claims will be paid. But critics say the law is just a bailout for the insurance industry.
Mark Wilhelm, an underwriter and executive vice president for Safety National Casualty Corp., which has 1,500 excess workers' comp policies covering 6 million people, says the government's failure to renew the act would force liability carriers to review their accounts.
"If TRIA is not extended, then the liability carriers will look at things and say, 'I'm not going to offer it, or if I'm going to offer it, it will be priced so that you can't buy it,'" he says.
In densely populated cities, which are considered to have higher exposures to terrorist attacks than rural areas, rates will shoot up, he says.
"We've made tough decisions in bigger cities," he says. "We've had to decline risk with uncertainty, and that will only get worse as the weeks go on."
Losses from a nuclear-biological-chemical attack could cause damage in excess of $600 billion, or more than 10 times the damage caused by Hurricane Katrina.
"One incident in Las Vegas, and the entire state of Nevada would be broke," says Stan Smith, corporate director of risk management for Boyd Gaming Corp.
With the entire U.S. property/casualty industry raising only about $200 billion a year in premiums, only the government is capable of responding to losses of the magnitude of $600 billion, the insurance executives said.
An alternative to TRIA would be to have the reinsurance industry sell products to meet the needs of primary carriers. But in another absurd irony, the reinsurance industry can't come up with products to sell because the government will not release terrorism loss data it considers confidential.
Yet it is exactly this data that excess carriers and reinsurers need if they are going to develop new policies to cover terrorism losses and price those products at rates buyers can afford.
"It's the nuclear-biological-chemical thing that has us the most worried," says Wilhelm. "And that's really what we need from the government, this mega-event type coverage."
December 1, 2005
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