Insurance & Risk, Analysis, Events and Careers
| LINE OF INSURANCE | LOW | HIGH |
| Workers Compensation | $ 3.0 | $ 5.0 |
| Aviation | 3.0 | 6.0 |
| Commercial Property | 10.0 | 12.0 |
| Life, AD&D | 4.5 | 6.0 |
| Liability | 5.0 | 20.0 |
| Business Interruption | 3.5 | 7.0 |
| Other | 1.0 | 2.0 |
| Total | $30.0 | $58.0 |
With several major global reinsurers having signaled that they will not be providing cover for terrorism-related losses as from the beginning of 2002 when most North American treaty renewals take place, the U.S. government has stepped forward with a temporary financial “backstop plan” to facilitate the expected reduction in reinsurance capacity.
The Bush administration announced in mid-October a plan that would see taxpayers pick up 80% of the first US$20 billion in insured terrorism losses for 2002. The government reinsurance plan would be phased out by 2004, according to the proposal, with the government’s liability decreasing in 2003 through to its conclusion.
The proposal caps the government’s exposure to insured terrorism losses next year to US$100 billion, although it does offer to pay 90% of insured losses exceeding the US$20 billion mark. By 2004, the insurance industry is expected to cover the first US$20 billion of insured terrorism losses, with amounts ranging from US$20 billion to US$40 billion to be equally shared with the federal government. In the final year of the plan, the government would pick up 90% of insured losses exceeding US$40 billion. The government reinsurance proposal was put forward as an alternative to insurance industry and regulatory body proposals of a government-backed fund similar to Pool Re, which operates in the U.K. market. According to a U.S. government statement, the prospect of implementing a Pool Re-type mechanism would be “too complex” from a regulatory standpoint.
The Bush proposal was received with mixed feelings by U.S. insurers. Although a temporary government reinsurance financing plan would be highly welcome in the short-term, many feel that a longer-term solution along the lines of the Pool Re concept needs to be implemented.
Just prior to the release of the U.S. government proposal, the Chicago-based National Association of Independent Insurers (NAII) released its own proposal calling for a temporary “backstop” government financing fund. The proposal was submitted to a special congressional committee appointed to investigate insurance financing for terrorism acts. NAII senior vice president Carl Parks notes, “the most important component of our proposal is that any federal intervention should complement the private insurance market and be of limited duration”. The NAII proposal suggested the following:
Federal financial involvement as a “high level backstop” for insurers;
That such a federal program should have a “sunset” clause for three years;
The program would be limited to covering terrorism reinsurance claims costs;
The program should not require a full-time federal regulator;
That contracts should provide “following form” coverage and not expand on coverage provided by current primary insurers.
Most recently, consultants Tillinghast-Towers Perrin released a discussion document on behalf of the American Insurance Association (AIA) highlighting the need for both a short and long-term financing mechanism for terrorism-related losses. The consultants confirm that many leading reinsurers will be restricting cover for this particular peril, and that many insurers will likely withdraw from the commercial property marketplace. To avoid economic disruption, Tillinghast supports the establishment of a government-backed reinsurance financing mechanism similar to Pool Re. Furthermore, the consultants note that subsequent losses of the magnitude expected from the September 11 terrorist attacks could severally threaten the solvency of the North American insurance industry. “Collectively, U.S. property/casualty insurers have roughly US$300 billion in statutory surplus…We estimate that the insurers most affected have statutory surplus of US$80-US$100 billion, roughly 30% of the industry total.”
With insured losses arising from the September 11 attacks likely to be in the range of US$30 billion to US$58 billion, the impact on the capital position of insurance industry will likely be severe, Tillinghast says. “A federal government mechanism that can quickly engage in the terrorism insurance marketplace would stabilize the insurance market in the short term, avoiding the economic disruptions that would flow from shortages in coverage…It is also arguable that such a federal mechanism would be necessary in the longer term, as well, given the nature of the risk.”
Tillinghast-Towers Perrin Estmates of Insured Losses Stemming From the September 11 Terrorist Attack ($ Billions)
| LINE OF INSURANCE | LOW | HIGH |
| Workers Compensation | $ 3.0 | $ 5.0 |
| Aviation | 3.0 | 6.0 |
| Commercial Property | 10.0 | 12.0 |
| Life, AD&D | 4.5 | 6.0 |
| Liability | 5.0 | 20.0 |
| Business Interruption | 3.5 | 7.0 |
| Other | 1.0 | 2.0 |
| Total | $30.0 | $58.0 |
With several major global reinsurers having signaled that they will not be providing cover for terrorism-related losses as from the beginning of 2002 when most North American treaty renewals take place, the U.S. government has stepped forward with a temporary financial “backstop plan” to facilitate the expected reduction in reinsurance capacity.
The Bush administration announced in mid-October a plan that would see taxpayers pick up 80% of the first US$20 billion in insured terrorism losses for 2002. The government reinsurance plan would be phased out by 2004, according to the proposal, with the government’s liability decreasing in 2003 through to its conclusion.
The proposal caps the government’s exposure to insured terrorism losses next year to US$100 billion, although it does offer to pay 90% of insured losses exceeding the US$20 billion mark. By 2004, the insurance industry is expected to cover the first US$20 billion of insured terrorism losses, with amounts ranging from US$20 billion to US$40 billion to be equally shared with the federal government. In the final year of the plan, the government would pick up 90% of insured losses exceeding US$40 billion. The government reinsurance proposal was put forward as an alternative to insurance industry and regulatory body proposals of a government-backed fund similar to Pool Re, which operates in the U.K. market. According to a U.S. government statement, the prospect of implementing a Pool Re-type mechanism would be “too complex” from a regulatory standpoint.
The Bush proposal was received with mixed feelings by U.S. insurers. Although a temporary government reinsurance financing plan would be highly welcome in the short-term, many feel that a longer-term solution along the lines of the Pool Re concept needs to be implemented.
Just prior to the release of the U.S. government proposal, the Chicago-based National Association of Independent Insurers (NAII) released its own proposal calling for a temporary “backstop” government financing fund. The proposal was submitted to a special congressional committee appointed to investigate insurance financing for terrorism acts. NAII senior vice president Carl Parks notes, “the most important component of our proposal is that any federal intervention should complement the private insurance market and be of limited duration”. The NAII proposal suggested the following:
Federal financial involvement as a “high level backstop” for insurers;
That such a federal program should have a “sunset” clause for three years;
The program would be limited to covering terrorism reinsurance claims costs;
The program should not require a full-time federal regulator;
That contracts should provide “following form” coverage and not expand on coverage provided by current primary insurers.
Most recently, consultants Tillinghast-Towers Perrin released a discussion document on behalf of the American Insurance Association (AIA) highlighting the need for both a short and long-term financing mechanism for terrorism-related losses. The consultants confirm that many leading reinsurers will be restricting cover for this particular peril, and that many insurers will likely withdraw from the commercial property marketplace. To avoid economic disruption, Tillinghast supports the establishment of a government-backed reinsurance financing mechanism similar to Pool Re. Furthermore, the consultants note that subsequent losses of the magnitude expected from the September 11 terrorist attacks could severally threaten the solvency of the North American insurance industry. “Collectively, U.S. property/casualty insurers have roughly US$300 billion in statutory surplus…We estimate that the insurers most affected have statutory surplus of US$80-US$100 billion, roughly 30% of the industry total.”
With insured losses arising from the September 11 attacks likely to be in the range of US$30 billion to US$58 billion, the impact on the capital position of insurance industry will likely be severe, Tillinghast says. “A federal government mechanism that can quickly engage in the terrorism insurance marketplace would stabilize the insurance market in the short term, avoiding the economic disruptions that would flow from shortages in coverage…It is also arguable that such a federal mechanism would be necessary in the longer term, as well, given the nature of the risk.”
Tillinghast-Towers Perrin Estmates of Insured Losses Stemming From the September 11 Terrorist Attack ($ Billions)
| LINE OF INSURANCE | LOW | HIGH |
| Workers Compensation | $ 3.0 | $ 5.0 |
| Aviation | 3.0 | 6.0 |
| Commercial Property | 10.0 | 12.0 |
| Life, AD&D | 4.5 | 6.0 |
| Liability | 5.0 | 20.0 |
| Business Interruption | 3.5 | 7.0 |
| Other | 1.0 | 2.0 |
| Total | $30.0 | $58.0 |
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