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WASHINGTONA long-awaited government report on the state of the terrorism insurance market is being met with both relief and disappointment from supporters of a continued federal terrorism insurance backstop.
The disappointment arises from the failure of the report by the President's Working Group on Financial Markets to endorse an extension of the federal terrorism insurance financial backstop created by Terrorism Risk Insurance Act in 2002. In fact, the report says that while terrorism risk reinsurance capacity has increased, "the presence of subsidized federal reinsurance through TRIA appears to negatively affect the emergence of private reinsurance capacity because it dilutes demand for private sector reinsurance." The backstop, which was scaled back by the Terrorism Risk Insurance Extension Act of 2005, is slated to expire on Dec. 31, 2007.
But supporters are relieved the report doesn't say outright that the program should expire. TRIA "has helped support a continued increase in private sector participation in the terrorism risk insurance marketplace," according to a letter from Treasury Secretary Henry Paulson accompanying the report.
The report says that the affordability and availability of terrorism risk insurance have improved since the Sept. 11, 2001, attacks and states that insurers "have made great strides in measuring and managing their risk accumulations." But it also notes that coverage for chemical, nuclear, biological and radiological terrorist risks remains scarce, and adds that "there may be little potential for future market development." A report issued last week by the Government Accountability Office came to a similar conclusion on CNBR risks (BI, Oct. 2).
While the report's findings could have been worse, "it's an unsurprising wash," said Joel Wood, senior vp-government affairs at the Council of Insurance Agents & Brokers in Washington.
"The plus was that it wasn't accompanied by a take-no-prisoners imperative that TRIA should end," he said. "The basic conclusion that TRIA continues to crowd out the reinsurance market is something with which we strongly disagree. The marketplace has been accessible only because of TRIA, not the other way around."
"It's refreshing to see that the (working group) has acknowledged that TRIA has stabilized the insurance market, in that insurers have made great strides in managing their risk accumulation," said Brad Wood, senior vp-risk management for Marriott International Inc. in Bethesda, Md. "Yet it fails to note that tighter insurer underwriting has resulted in reduced capacity that's been made available to policyholders. Conversely, the report suggests that private terrorism reinsurance is increasing and that taking the federal government out of reinsurance will result in more capacity.
"Though that may be true to some extent, it is far from a market reality when you're a risk manager trying to garner adequate capacity at a reasonable price," said Marriott's Mr. Wood. "You only have to look back to the market realities of December 2005, when risk managers faced sunset clauses in anticipation of the TRIA extension not occurring."
"RIMS believes that the report from the PWG confirms there is little appetite for a completely private-sector solution for the terrorism exposure," said Terry Fleming, a member of the board of the New York-based Risk & Insurance Management Society Inc. with responsibility for external affairs. "We implore Congress and the administration to work with us and our industry partners to develop a long-term program," he said.
"They got some things right," said Leigh Ann Pusey, senior vp-federal affairs and chief operating officer of the American Insurance Assn. in Washington. "There is no private market for CNBR, period," she said.
"I think it's a plus compared with what expectations were," said Ben McKay, senior vp in the Property Casualty Insurers Assn. of America's Washington office. "They acknowledged that the program is working; they acknowledged that within the box that the TRIA program creates, a market is developing, which of course is critical to general economic expansion."
Mr. McKay also stressed the report's admission that there appears to be no private appetite for CNBR risks. "If that's uninsurable, the next step is to acknowledge that terrorism generally is uninsurable," he said.
"The report starts with zero reinsurance capacity immediately after 9/11," said Frank Nutter, president of the Reinsurance Assn. of America in Washington. "It rises to not very much--$4 billion to $6 billion in 2005--to not nearly enough, that is $6 billion to $8 billion."
"It's quite clear there's insufficient reinsurance capacity to help the industry meet its needs," he said, adding "it's hard to see how the presidential working group can draw the conclusion that the program is crowding the private reinsurance market."
"From our perspective, we were frankly somewhat pleased and surprised with the balanced nature of the report," said Aaron Davis, director of Aon Corp.'s National Terrorism and Property Resources unit in New York. Mr. Davis added, though, that Aon found some of the report's conclusions "troubling," including the finding that TRIA has hampered the development of a private reinsurance market for terrorism.
"It's important to point out that the market" cannot replace the $100 billion in capacity provided by the backstop, he said.