U.S. RE Proposes Government/Industry Facility For Terrorism Risk Reinsurance Coverage
A governmental-private sector partnership reinsurance facility to provide a long-term replacement for the federal Terrorism Risk Insurance Act, which expires at the end of this year, has been proposed by the U.S. RE Group, Tal P. Piccione, Chairman/CEO, announced (see page 2/3 for details).
"We strongly support extension of the present program to allow time to forge an industry-government consensus on a long-term solution. We are now approaching industry leaders and trade association executives with a proposal to create a Terrorism Risk Reinsurance Facility to stimulate discussion that would by objective create a workable partnership between government and industry," Piccione said.
"U.S. RE was asked last year by the Treasury Department to provide it with advice on an alternative format to the present program in anticipation of its sunset provision. The Department, along with other governmental leaders, hopes to see a workable plan developed to replace the current program and recently permitted U.S. RE to release the details of the work undertaken thus far to the American Insurance Association and other constituents in the industry," he explained.
We met recently with senior executives of the American Insurance Association and plan to meet with other associations and industry leaders over the foreseeable future," Piccione said. "We are finding a receptive attitude toward achieving an industry-government partnership. Financing the coverage requires a government backstop because it is impossible to predict the frequency and severity of potential terrorism events," he explained.
The Terrorism Risk Reinsurance Facility (TRRF) proposed by U.S. RE would be a tax-exempt, quasi-governmental entity to pay terrorism losses in excess of individual company retentions for all commercial lines up to a maximum industry loss of $45 billion in any year. Industry retentions would be pegged at 15 percent of prior year commercial premiums, or about $30 billion. This would provide up to an estimated $75 billion of terrorism coverage per year.
Funding for TRRF would be provided by insurance companies through payment of a percentage of commercial lines premiums annually. In the event that an act of terrorism occurs before the fund is capable of paying the losses, the federal government would lend the facility money to cover the shortfall until the fund builds up.
Companies participating in TRRF could surcharge policyholders up to a percentage of Direct Earned Premiums per year to pay off any shortfall obligations. Premiums paid into the facility would be deductible as a reinsurance expense. Insurers paying into the facility would concurrently be issued equity in the reinsuring entity in return for their contributions over the years. "In effect, insurers would be using pre-tax dollars to fund the limit while at the same time being able to assetize their contributions in their financial statements," Piccione stated.
"We welcome comments and suggestions, recognizing that this proposal is intended primarily as a means to enhance the process of developing an industry consensus," he commented.
U.S. REviews Fall 2005