Risk managers worried by plans to reduce terrorism backstop and inhibit reinsurance ceding
President Barack Obama’s budget blueprint has triggered deep concern from insurance consumers in the US, who consider two of the proposals detrimental to the provision of commercial insurance.
The Risk and Insurance Management Society (RIMS), which represents commercial insurance buyers in the US, described the proposals as thus:
First, for the second consecutive year, the Obama Administration has attempted to reduce or eliminate the federal underpinnings of terrorism insurance. “The Administration’s proposal to eliminate $250 million is regrettable and disappointing, from the consumer perspective,” said Scott Clark, RIMS secretary and director of RIMS External Affairs Committee and Risk and Benefits Officer for Miami-Dade County School Board.
“In 2007, Congress reauthorized the Terrorism Risk Insurance Act (TRIA) for a seven year period. TRIA and the federal government’s commitment to act as the ultimate backstop for terrorism insurance served to stabilize the market for policy holders,” Clark added. “This legislation was the product of much negotiation and compromise from all political parties, chambers and branches of government. To attempt to withdraw the government’s support will adversely impact the availability and affordability of terrorism insurance. We hope that Congress will once again see the wisdom in not adopting this as part of its budget going forward.”
Second, Clark noted that a proposal contained in the Administration blueprint would impair the insurance market for individual and commercial insurance policy holders. The FY 2011 budget appears to adopt, in concept, legislation introduced in the House of Representatives that denies the tax deduction for reinsurance premiums paid to foreign affiliates by domestic insurers. Similar to the legislation sponsored by Rep. Richard Neal (D-MA), the proposal would have a chilling effect on these insurers and reinsurers who provide an important safety valve in many areas of the country. The proposal would inhibit domestic companies with foreign affiliates from engaging in a legitimate risk management practice; ceding reinsurance to an affiliate in order to provide for greater capacity and liquidity.
According to Clark, an economic study of the legislation estimates that if the proposal was enacted into law, it would cost consumers $10-12 billion a year. “This far exceeds the revenue estimate of $233 million savings the Administration is projecting over five years at a far greater cost to individual policy holders and businesses of all types and sizes,” said Clark.
Noting the two proposals in the budget, Clark stated that there is an inherent conflict in policy goals. On the one hand, the Administration is curtailing the government’s commitment to ensure a stable market for terrorism insurance. On the other, it is acting to restrict one of the primary means the industry uses to manage its terrorism risk through reinsurance. According to Dowling and Partners, 64 percent of the losses related to 9/11 were paid by non-United States insurers and reinsurers. RIMS intends to strongly oppose both proposals.
