Are Insurers Really Asking the Governmentfor Help’

The term “Big Brother” has been tossed around casually since George Orwell introduced the term to the world in his novel, 1984. The concept of big government looking over the shoulder and into the bedrooms of ordinary citizens has become as repulsive as a chaperone on prom night.

Granted, the events of Sept. 11 may have blurred our expectations when we gaze at the tall buildings that form the skyline of most major cities. But have the standards changed so much that insurance companies have actually turned to the federal government to provide a soft landing from the high-wire act that is the foundation of the insurance industry?

A few weeks ago, the U.S. House Financial Services Committee reacted to a plea from reinsurance carriers and approved a terrorism insurance assistance plan that would provide government loans to keep insurance—and specifically the reinsurance industry—afloat in the event of another major terrorist incident.

“We need help right now from the federal government, even if that means a loss of control,” Herb Goodfriend, the senior vice president of Gill & Roeser Inc., told an audience at the annual meeting of the Chartered Property and Casualty Underwriters in Seattle.

Tom Langley, senior vice president of American Re-Insurance Company, told the same gathering that the insurance industry has the ability to recover from the one-time loss from the attacks on the World Trade Center, but will need help from the federal government to withstand similar devastation if another event occurs before the industry has time to rebuild reserves. Langley stepped in at the CPCU conference in mid-October so that his boss, American Re president and CEO Edward J. Noonan, could join the chorus of pleas staged for Congress by an all-star lineup of reinsurance executives.

Langley put the situation into perspective when he half-seriously predicted that, without a bailout from Washington, there may not be enough companies left in the reinsurance arena next year to compile a list of the “Top 25” providers. Approximately 70 percent of all reinsurance policies will expire at the end of the year, and experts expect most reinsurance companies to refuse to include any kind of terrorism coverage without some sort of federal safety net in place.

The loan program approved by the house committee should be considered a backstop, and not a bailout, according to Committee Chairman Mike Oxley (R-Ohio). The bill’s primary sponsor, Richard Baker (R-La.), described the legislation as an attempt to limit immediate market disruption and encourage economic stabilization while facilitating a transition to a viable market for private terrorism coverage.

Long term, HR 3210 would allow insurers to set up tax-deferred reserves that could only be used for future terrorism claims. The fund would also be available if a company became insolvent.

The proposed legislation would establish a “dual-trigger” mechanism that would hold the reinsurance industry responsible for only the first $1 billion in losses from a terrorist event before the government steps in to save the day. A single company would qualify for government assistance if it suffered a 10-percent hit to both its written premium and capital. A Senate Banking Committee version of the bill calls for a direct quota-share agreement for claims up to $10 billion.

For reported losses from $10 billion and up to $100 billion, the federal government would front the cash to cover 90 percent of the claims, leaving secondary carriers with responsibility for 10 percent of the claims and question of repayment up in the air. Congress could be forced to evaluate any losses in excess of $100 billion.

“That would make the government responsible for a percentage of infinity,” said Donald J. Hurtzeler, president and CEO of Zurich Middle Insurance. Hurtzeler called on the government to declare any future significant attack an act of war, if only to protect the insurance industry.

“We need to ensure the role of insurance,” said Michael McGavick, SAFECO president and CEO. “This industry cannot rely on exclusions.”

The Big Brother that has evolved from the rubble of Ground Zero looks nothing like Orwell’s concept of the world envisioned 17 years ago. In fact, the federal government looks nothing like a sibling at all. Congress—with all of its tax-cutting and budget-balancing heroes in place—looks a lot more like the father who repeatedly comes to the rescue of his cash-starved offspring away at college.

Although the insurance industry is not technically asking for a bailout, is there an industry in all of America that was more outspoken about government keeping its nose out of corporate boardrooms than insurance?

However, when all the dust has settled, I am sure that our elected officials will play the role of the cavalry, and rescue insurance—and reinsurance—carriers from the clutches of financial despair.

Dan Aznoff is the former editor of Insurance West. He is now a freelance writer based in the Pacific Northwest focusing his time on issues that require social action and establishing a family of community newspapers. Send him an e-mail at ijwest@insurancejournal.com.