Terrorism Risk Reinsurance Facility: A Private/Public Proposal for the Long-Term
TRIA was passed by Congress in 2002 to provide for a federal reinsurance backstop for upwards of three years. It initially was intended by the government to enable sufficient time for the private insurance sector to develop the means to offer terrorism coverage to policyholders without the government having to maintain its existing role beyond the three-year period. U.S. RE's proposal is directed to a long-term solution. We were pleased last year to be asked by the Treasury Department to advise on alternative formats for terrorism risk coverage. At that time, the present TRIA program was set to expire at the end of this year. With present legislation to renew the program for a limited period, there is time for the industry and government to develop a long-term solution. Our proposal is intended to provide a basis for discussion in the dialogue that will take place over the next few months.
In undertaking our proposal we have followed our philosophical perspective that private enterprise in and of itself should be the first port of call in engaging in commerce. To the extent that the private sector is unable to do so, we have always said that the next alternative should be to explore a government and private sector partnership. The government should act as the insurer of last resort only in those rare situations where the risk is totally beyond the industry's ability to predict or quantify the risk.
We concluded after extensive discussions in Washington, that the federal government does not wish to participate in a reinsurance program for terrorism risk over the long run without having the private sector more directly involved. This led us to consider a proposal for the private sector to build a fund over a period of time with the government remaining as a backstop during the buildup. Since terrorism is a significant threat to our nation and the need for related coverage to policyholders is important for America's economic welfare, we believe special legislation to mitigate the burden on insurers is feasible.
Our format is based on the assumption that the difficulty in modeling terrorism risk requires an approach that stipulates a pre-agreed amount of time to fund the limit and determine the level of premium to be paid over time to the reinsurance entity that would eventually replace the current provider. It also enables the cedant to utilize pre-tax dollars simultaneously to acquire the protection and receive an equity position in the reinsuring entity; akin to purchasing reinsurance with the premiums also applying to the acquisition of equity in that same entity.
We invite you to review an outline of the program (see page 1/3). Other components including an economic analysis are available to companies and associations concerned over the need for long-term solutions.
U.S. RE's objective is to foster an industry consensus within the foreseeable future. It is hoped that our work will spur a cohesive and acceptable approach to both the private and public sectors. We welcome your comments and input.
Tal P. Piccione
Chairman and Chief Executive Officer
U.S. REviews Fall 2005 Chairman's Corner
