Back Stop…or “Stopped”

With the deadline for yearend reinsurance renewals rapidly drawing near, a political game of “chicken” appears to be in play between insurers, reinsurers and the federal government.

The Insurance Bureau of Canada (IBC) established a special task group following the September 11 terrorism attacks in the U.S. to establish what future risks and consequences could face the Canadian property and casualty insurance market. The most pronounced and immediate threat was disruption of the marketplace as reinsurers have indicated that they will not be providing cover in 2002 for terrorism-related losses.

Insurers responded by approaching the federal government to step in with a temporary reinsurance facility to allow the market to adjust to the real risk factors involved with this particular peril. At the time of going to print, there remained a standoff between the government and insurers over the terms of such an arrangement. The Canadian government is said to be also waiting for policy direction from U.S. legislators in how they plan to deal with reinsurance of terrorism risks. Once again, the bureaucratic halls are echoing a deaf silence as members of congress squabble over partisan issues and trade-off deals.

Meanwhile, many U.S. insurers have notified state regulators, brokers and clients alike that they do not plan on providing terrorism cover for 2002 unless the government comes forward with a reinsurance funding mechanism along the lines of the U.K.’s Pool Re before the December vacation break, as reported by several news publications including the Wall St. Journal. Similar developments have occurred in Canada, with several commercial brokers having indicated that insurers are unwilling to confirm 2002 renewals without having finalized their own reinsurance treaties, most of which expire on December 31. In conjunction with its investigation into the terrorism risk facing Canadian insurers, the IBC also drew up “model policy wordings” for members opting to exclude terrorism risks.

While the U.S. market seems to be no closer to agreement than it had been just weeks after September 11, there is general optimism among Canadian insurers that the Canadian government will step in before the yearend deadline. However, the “chicken game” continues, with some reinsurers said to be willing to offer terrorism cover on personal lines, but only if other members of a treaty are willing to do so. The government is supposedly willing to step in and provide temporary reinsurance cover on commercial business only, on the basis that insurers should be able to gain reinsurance on personal lines through regular channels. Insurers, however, point out that this situation becomes a “catch 22” in that not all reinsurance treaty members will agree to providing such cover, hence it becomes impossible to complete a treaty.

The government appears to be sticking to the line, and the IBC has submitted several revised proposals on how to deal with government reinsurance financing, according to a source. Most recently, insurers seem willing to back off on the personal lines inclusion for now as a means of getting the wheels of the market turning again.

As outlined in a news feature in this issue of CU on page 22, the IBC proposal leans away from the Pool Re and other government reinsurance proposals punted south of the border, claiming that these options are “too complex, too costly, and to dependent on government”. The IBC is calling for a temporary government solution, or a “back stop” coverage plan until normal reinsurance capacity returns to the marketplace. Under the plan, insurers would pay the government a reinsurance premium for terrorism cover. The prime areas of risk are assumed to be downtown Toronto, Montreal and Vancouver. In the event normal reinsurance capacity does not return to the market, or the risk exposure increases, the IBC concedes that longer-term government involvement in the insurance of terrorism risks may be required.

At this point, insurers are adamant that either they get government assistance through the called for “back stop” plan, or coverage of terrorism risks will be “stopped” or limited according to regulations – for instance “fire following” cover where insurers may be blocked by the legislators in excluding terrorism cover. It is clear, however, that whatever the format of government involvement in the area of terrorism insurance, involvement is indeed required to achieve market stability. In fact, the government faces greater social-economic risk by not acting in terms of businesses and individuals not being able to gain financing without adequate insurance cover of assets at risk. The disruption to the economy, particularly at this sensitive stage of the economic cycle, could be disastrous.