US Coalition Calls For Insurance Industry Reform

Marc Jones
Reinsurance Magazine
August 9, 2005

A coalition of 134 national and regional insurance companies and agencies, banks and trade associations have asked Congress to enact optional federal insurance-charter legislation in an effort to push for reform in the insurance industry.

"Consumers, and the insurers and insurance agents that serve them, need a modern insurance regulatory system that provides greater product choice and portability," the Optional Federal Charter Coalition (OFCC) said in an open letter to Congress.

The letter also noted that establishing an optional federal charter would not supplant state regulation or premium taxation. The new system would allow insurers and agents to choose between state and federal regulation, similar to the dual-banking system that has been in place for more than 140 years.
"The burden of having to comply with rules from 56 separate insurance regulators is too inefficient for companies, agents and consumers to manage, especially those whose interests are national in scope," the letter continued. "Individual state regulators cannot speak to our national or global interests with the same scope and effectiveness as a strong, federal entity, such as the Department of the Treasury or the Federal Reserve."

The need for modernization, the OFCC noted, is necessary to compete successfully in today's market. To operate or deliver a product to market, insurers face many obstacles, such as inconsistent regulations, barriers to innovation, and conflicting agent and education requirements.

"We have been working with the state regulators to develop model laws and uniform product standards, but despite decades of effort and good intentions, they have been unable to provide an efficient, uniform regulatory structure," the coalition said. "An op-tional federal charter preserves states' rights, while allowing insurance regulation to move into the 21st century."

The OFCC represents the largest and most diverse group pushing for a modernised insurance regulatory system. Corporate supporters represent every branch of the insurance and banking industry. Trade group members include Agents for Change, the American Bankers Association, the American Bankers Insurance Association, the American Council of Life Insurers, the American Insurance Association, the Council of Insurance Agents and Brokers, the Financial Services Forum and the Financial Services Roundtable.

The terrorism-insurance system in the US is failing to provide businesses with adequate financial protection, leaving the nation vulnerable to economic disruption if there is a major terrorist attack, according to a new RAND Corporation study.

The report, by the RAND Centre for Terrorist Risk Management Policy, says the terrorism-insurance system is not robust enough to respond to a rapidly evolving terrorist threat against US businesses.

"America's economy does not have adequate financial protection from terrorist attacks," said Peter Chalk, a RAND terrorism expert and lead author of the report. "Protecting businesses against the economic impact of a terrorist attack should be part of a robust homeland security effort." Other report authors include Bruce Hoffman, Robert Reville and Anna-Britt Kasupski of RAND.

The study points out that terrorism insurance does not cover losses caused by attacks from domestic terrorist groups. Also, most insurance polices now exclude coverage for attacks involving chemical, biological, radiological and nuclear (CBRN) weapons.

The study found that many businesses are not buying the terrorism insurance that became available after the September 11, 2001 terrorists attacks, thus increasing the potential economic damage that would be caused by a new terrorist strike on the US.

The report recommends that Congress consider proposals to increase the number of businesses buying terrorism insurance by lowering its price. It says this could be done without increasing the costs to taxpayers by changing the terms of federal reinsurance.

Congress should also consider:

- expanding and improving the financial protections offered by the Terrorism Risk Insurance Act (TRIA), instead of allowing the law to expire as scheduled in December;

- requiring that terrorism insurance cover acts by domestic groups and attacks involving CBRN (researchers acknowledged that the latter's challenge may be most appropriately covered through a direct government insurance programme); and

- creating a national board that can assess the performance of TRIA or its successor.

The September 11 attacks caused substantial losses for the insurance industry, with current estimates topping $32bn in payments. As a result, insurance companies began ex-cluding terrorism coverage from policies shortly after the attacks.

In response, Congress enacted TRIA in 2002, which requires insurers to offer commercial terrorism policies and provides federal aid as a safeguard to cover losses on the scale of September 11. The move was seen as a step to give insurance companies time to assess their exposure to terrorism losses, and to consider how to price and underwrite terrorism insurance policies.

Post-TRIA trials

Comparing the continuing threat of terrorist attacks to the insurance coverage provided under TRIA, researchers conclude more needs to be done to extend financial safeguards against terrorist attacks. Since TRIA expires at the end of 2005, the current terrorism insurance system will be dissolved unless Congress extends or revises provisions of law.

The RAND study notes that a number of trends in terrorism have increased the risk to the private sector since September 11. These include an increased focus on "soft" business and commercial targets, both as a result of heightened security at government and military facilities and due to the degradation of al-Qaeda's operational capacity to execute long-range strategic strikes.

In addition, the report points out that al-Qaeda has shown increased interest in launching attacks designed to cause mass disruption and economic harm, magnifying the importance of private-sector targets.

One scenario with the potential for devastating uninsured losses highlighted in the report was an attack with a so-called "dirty-bomb" - an explosive device that disperses radioactive material.

Rather prophetically, the RAND report warned that the US still faces a potent threat from al-Qaeda, despite significant efforts made since the 2001 terrorist attacks to disrupt and weaken the group.

Copyright © 2005 Timothy Benn Publishing Limited

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