U.S. trade groups react to NAIC ruling on personal lines terrorism exclusions

Following a decision by the U.S. National Association of Insurance Commissioners (NAIC) not to allow terrorism exclusions on personal lines policies, insurers are reacting with dismay. Through their trade associations, including the National Association of Independent Insurers (NAII) and the National Association of Mutual Insurance Companies (NAMIC), insurers are expressing concerns over a vote of no-confidence by the NAIC on the issue which is leading insurance commissioners in most states to reject the exclusions.In a statement released just after the NAIC’s decision, NAMIC vice president of regulatory affairs Roger Schmelzer says, “The challenge currently faced by all insurers is a lack of experience in assessing future terrorism losses.” He says that those “unquantifiable losses” are a real threat to personal lines insurers in terms of the impact they could have on solvency. “Terrorism exclusions should be available to any insurers who are concerned that these risks could adversely affect their policyholders.”The NAIC had given the okay for insurers to offer exclusions on commercial policies in the absence of a federal backstop plan. As reinsurers began writing terrorism exclusions and with the U.S. government dragging its heels on putting through a state-sponsored plan, the NAIC felt it reasonable to allow insurers to write in the exclusions. However, this same permission will not be given on auto and homeowers policies following a unanimous vote by the NAIC (while the choice is ultimately the territory of state regulators, the NAIC vote is seen as a recommendation and a sign of the will of state regulators).In releasing the decision, NAIC president Terri Vaughan said, “It is the sense of the NAIC membership that terrorism exclusions are generally not necessary in personal lines property and casualty products to maintain a competitive market, and they may violate state law.” However, Vaughan did acknowledge that state laws might differ on the issue and that “there may be unique company circumstances that need to be considered in individual cases”. Schmelzer says this is some consolation to insurers. “While NAMIC would have preferred that the NAIC would have endorsed the use of exclusions for personal lines writers, NAMIC is pleased that the opportunity remains available to those companies who feel it is warranted to seek permission from their individual regulator.”In a separate statement, the NAII says it is “greatly disappointed” with the NAIC’s decision to apply different rules to personal lines versus commercial lines insurers, given that both face the same exclusions in the reinsurance market. “The bottom line in our message to the NAIC is still that many small and medium-sized companies may not be able to absorb a $25 million loss before the exclusionary wording in the ISO endorsement is activated and without adequate reinsurance or a workable federal reinsurance backstop legislation,” says Robert Zeman, NAII vice president and assistant general counsel.At the same time, insurers continued their push for a government backstop plan at the American Insurance Association (AIA) conference in Washington. Insurers were told that the government requires more information before making a decision, specifically about what the impact will be for companies not carrying the coverage and the economy. Some news sources have questioned whether the lack of coverage will actually influence the desire of banks to lend money to building projects and therefore negatively impact the economy.The AIA notes, “Many sectors of the American economy are beginning to feel the effects of the insurance crisis, with terrorism insurance now either difficult or impossible to obtain. Federal securities lawyers are even raising the prospect of whether a company’s lack of terrorism insurance coverage should have to be disclosed to investors as a potential material risk.”