Terrorism Risk Insurance Program: A Progress Report

With a federal terrorism reinsurance backstop now in place, the industry is faced with implementing the provisions of the legislation in a timely and efficient manner. This has and will continue to require unprecedented cooperation among insurers, the federal government and state regulators. To date, there have been three guidance documents issued by the Treasury Department, and the Alliance of American Insurers expects many more.

The Alliance has been very impressed by the quick action of senior Treasury officials like Peter Fisher and Wayne Abernathy in issuing interim guidelines for the industry. We are equally grateful for the leadership shown by Terri Vaughan and Mike Pickens of the National Association of Insurance Commissioners in trying to develop a smooth implementation plan.

This is no easy task for the industry. Notifying millions of policyholders will take a monumental effort, but the quick action by the NAIC in providing model disclosure forms provides a good start.

The new law is crucial to insurance market stabilization in the aftermath of Sept. 11, 2001. This legislation is vital to the nation’s economic security. Should the unthinkable happen again—and we hope it never does—the terrorism insurance law will provide a critical backstop to help defray the catastrophic costs of future attacks.

There is an enormous expectation from policyholders in the commercial marketplace, and from lawmakers and regulators in some states, that the price for business coverage will be impacted because of the backstop. We believe the new program will stabilize the market, and provide greater certainty to underwriters, which, over time, will impact pricing. That will happen, however, on a gradual basis. There is evidence that the market is reacting with a more moderate approach to pricing and terms of coverage for current renewals. The program is working.

It’s important to note that this program requires a substantial financial commitment from insurers. We believe it will spread the risk, stabilize the market, and give insurers the opportunity to once again provide coverage without the pending threat of insolvency from a future terrorist act.

There has been some initial confusion in the marketplace, but our expectation is that the companies working with the Treasury department and the NAIC are managing that in as efficient a manner as possible. The Alliance and the entire industry are working closely with the Treasury department and the NAIC in order to make the transition as smooth as possible.

The Alliance hopes that individual states will make every attempt to cooperate with the NAIC to have a unified approach to dealing with issues that arise under the new legislation. The extent to which states attempt to work together—during what is essentially a national emergency—will largely determine how successful the implementation of the terrorism insurance legislation will be, and will further the long-term interests of state-based regulation.

Likewise, the Alliance does not see any compelling interest for significant divergence in implementing the new program. We believe every attempt should be made to approach this issue in a unified manner.

How well this program is handled by insurers and the states is bound to draw the scrutiny of the federal overseers. If things do not go smoothly, supporters of federal regulation may point to any problems as supporting documentation for their argument. That has not been the case thus far.

Insurers are committed to working with officials in the Administration and state insurance regulators to develop implementing regulations for the Terrorism Reinsurance Program that will serve both the interests of the American consumer and the needs of the insurance industry in the event that the nation is the victim of another terrorist attack during the term of the program.

We are also committed to addressing terrorism issues not addressed in the federal program, such as the need for changes in the standard “fire following” provisions of fire insurance policies. States must address this and acknowledge the need to exclude the coverage when it comes to terrorist acts.

In addition, because the backstop is only a three-year program, the industry must begin to address the long-term issue of developing sound models for underwriting terrorism coverage. Some of this has already been done, but they will be refined over time.

The debate over whether terrorism is insurable is over, as companies and the federal government are working to implement a workable system. So far, the cooperation on both sides has been
commendable.

David M. Farmer, the Alliance of American Insurer’s senior vice president for federal affairs, joined the association in 1977, and since 1982, has headed the group’s Washington, D.C., office. He is responsible for the Alliance’s activities as they relate to the executive and legislative branches of the federal government.