Help

BI’s Article search uses Boolean search capabilities. If you are not familiar with these principles, here are some quick tips.

To search specifically for more than one word, put the search term in quotation marks. For example, “workers compensation”. This will limit your search to that combination of words.

To search for a combination of terms, use quotations and the & symbol. For example, “hurricane” & “loss”.

Login Register Subscribe

Terror cover backstop still seen as vital

Buyer, industry groups urge administration to continue program

Reprints

WASHINGTON—If Congress allows the federal terrorism insurance backstop to expire, an alternative government-backed program must be put in place, risk managers and others say.

The federal backstop, which began with the Terrorism Risk Insurance Act of 2002 and was extended by the Terrorism Risk Insurance Program Reauthorization Act of 2007, isn't slated to expire until 2014. But in comments filed with the President's Working Group on Financial Markets during recent weeks, backstop supporters made clear that they believe the program is working well and must be continued.

The working group sought comment on the long-term availability and affordability of terrorism risk insurance to meet the legal requirement that the working group, which is chaired by Treasury Secretary Timothy Geithner, conduct an ongoing analysis of the terrorism insurance market. It is required to submit its findings to Congress this year.

An additional report should be filed in late 2013, about a year before the program must be extended or allowed to expire.

Risk managers want to see the backstop continued.

“Though we have several years until the expiration of the act, all indications today are that there has been no change in behavior in the insurance markets” that would suggest that the program could lapse, Bradley R. Wood, senior vp-risk management at Marriott International Inc. in Bethesda, Md., and a longtime backstop advocate, said in an interview.

“It's important to lay the groundwork now in anticipation that policyholders will continue to find the act to be critical” in their efforts to procure reasonably priced and adequate insurance coverage, he said.

The New York-based Risk & Insurance Management Society Inc. made the same points in a comment letter filed with the Obama administration just before the comment period ended last week.

“The past seven years have demonstrated that the private sector alone is not able to sustain a competitive and healthy market for terrorism insurance,” RIMS President Terry Fleming, who also is director-division of risk management for Montgomery County, Md., in Rockville, wrote in the comment letter.

He said the federal backstop “has worked well since its inception” and was improved in 2007 by covering acts of domestic as well as foreign terrorism. He said RIMS believes “it is highly unlikely that terrorism risk insurance would continue to be available” at current coverage levels and prices if the federal government were to withdraw its support.

If the program expires, “there must be some alternative government-supported plan in place,” Mr. Fleming wrote. “The commercial insurance market cannot adequately predict or measure the financial impact of terrorism and it will not be able to provide adequate coverage for this exposure.”

“We think there is still a need, that the coverage will not be affordable or available if the federal government does not provide a backstop,” Mr. Fleming said in an interview last week. As far as renewing the program, “we figure we have to fight that battle again in 2013 and 2014,” he said.

Insurance industry groups also called the program necessary in their comments.

Without a federal program, “it is doubtful that a private market for "conventional' terrorism insurance would exist, particularly for commercial properties and employment locations in what are considered "high-risk' geographic areas,” the Indianapolis-based National Assn. of Mutual Insurance Cos. wrote in its comment.

Even with a federal terrorism backstop, “there remains no potential for private-market development for chemical, nuclear, biological and radiological coverage” because of the nature of those risks. “Any "solution' to that problem will need to be underwritten by the federal government, not the private insurance industry,” NAMIC wrote in its comment letter.

Looking ahead, Marliss McManus, senior federal affairs director at NAMIC's Washington office, said in an interview last week that the 2013 review “will be the most timely study because Congress will be looking at reauthorizing the program, because it expires in 2014.”

Permitting the program to expire without a successor backstop would eliminate the safety net it provides and “place more emphasis on those risk characteristics that are not controlled by the private market,” J. Stephen Zielezienski, senior vp and general counsel of the Washington-based American Insurance Assn., wrote the working group. The “inevitable result” will be increased volatility and a “reluctance to expand capacity absent government intervention,” he wrote.

The Washington-based Council of Insurance Agents & Brokers predicted that allowing the program to lapse would result in terrorism risk coverage not being “widely available in the locations and industries at high risk,” CIAB President Ken Crerar wrote. “To the extent that coverage would be available, it also is likely that prices will increase significantly, and that policy terms and conditions will be very restrictive.”

Capital is the key factor for determining availability of terrorism insurance, wrote David M. Golden, senior director-commercial lines at the Des Plaines, Ill.-based Property Casualty Insurers Assn. of America. “There simply isn't enough capital available in the property/casualty insurance industry to maintain a viable terrorism insurance market without continuing the government backstop,” he said in his comment.