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Terrorism insurance backstop a must: Industry groups


WASHINGTON—If Congress allows the current federal terrorism insurance backstop to expire, an alternative government-backed program must be put in place, the Risk & Insurance Management Society Inc. has told the Obama administration.

RIMS President Terry Fleming made that comment in a letter filed late last week to the President's Working Group on Financial Markets, which in June published a notice in the Federal Register seeking comment on the long-term availability and affordability of terrorism risk insurance. The comment period ends Monday.

U.S. law requires the working group chaired by Treasury Secretary Timothy Geithner to conduct an ongoing analysis of the terrorism insurance market and submit its findings to Congress later this year. 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, is slated to expire in 2014.

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

He said the federal insurance 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 withdraws 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.”

The Indianapolis-based National Assn. of Mutual Insurance Cos. made the same points in comments filed Monday.

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,” NAMIC wrote. 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.”

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,” wrote J. Stephen Zielezienski, senior vp and general counsel of the Washington-based American Insurance Assn., to 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 mean that terrorism risk coverage would not be “widely available in the locations and industries at high risk,” wrote CIAB President Ken Crerar. “To the extent that coverage would be available, it is also likely that prices will increase significantly, and that policy terms and conditions will be very restrictive.”