Aon: Private Insurance Market Will Fail Without Some Form of Public Backstop Against CAT Terror Losses

In anticipation of the Oct. 7, National Symposium on the Future of Terrorism Risk Insurance, Aon said Wednesday that the private insurance market cannot operate without some form of public backstop against catastrophic terrorism losses.

According to the company, the Terrorism Risk Insurance Act of 2002 (TRIA), while not perfect, has provided the terrorism insurance market with tremendous benefits in terms of increasing capacity and decreasing the price of terrorism coverage.

Aaron Davis, vice president, Aon Property Syndication, said, “Insurance is a lynchpin in any economic recovery following a catastrophe loss. The less insurance risk transfer, the greater exposure to the economy in general. Indirectly or directly, the federal government will end up funding for a terrorism loss, particularly if a majority of it is uninsured. This scenario is unacceptable in light of the continuing and escalating risk of terrorism. The public/private partnership that has emerged following 9/11 should continue in the absence of a realistic private solution.”

According to Davis, Aon has already noticed an up-take in commercial clients opting for terrorism cover in their property insurance policies, as well as a substantial increase in pricing. This stands to reason, as without TRIA mandating that carriers offer set levels of terrorism cover, a number of markets simply will no longer carry terrorism risks. As with any supply/demand scenario, the finite amount of terrorism insurance capacity will force prices to increase.

Davis said, “Companies that can find terrorism cover will also find significant increase in price, and those will be the lucky ones. Due to limited capacity, there will be many commercial interests that won’t be able to secure any terrorism coverage at all. In this situation, any public/private backstop solution is welcomed when faced with the prospect of a terrorism insurance market in the U.S. without a catastrophic safety net in place.”

Aon Re, the company’s reinsurance brokerage group, has created a proposed framework of such a solution, one that would involve the creation of a privately funded, federally mandated “facility” and bonding process that would support insurers’ ability to provide adequate and affordable terrorism coverage.

Bryon Ehrhart, president, Aon Re Services, said, “In consultation with several insurers, industry groups and after considering the potential severity of terrorism losses, we’ve developed a long-term solution to the issue of terrorism risk in the United States. Our proposal centers on a mandatory terrorism reinsurance facility with several key features. As with any long- term solution, many of the concept’s key requirements entail significant federal government legislative action – similar to the federal mandate and override of individual state insurance regulation introduced through TRIA.”

Key principles to the Aon Plan include:

* Facility will be structured to fund up to two USD$40 billion events;
* U.S. Government to attach in excess of USD$40 billion up to
* USD$100 billion, with losses above USD$100 billion to be reviewed by Congress;
* Losses up to USD$40 billion in excess of cash accumulated in the facility will be funded through issuance of tax-exempt bonds;
* Facility will be tax exempt;
* Facility to provide 95 percent quota-share reinsurance coverage on covered losses up to a total industry loss of USD$40 billion;
* Losses covered by the Facility will be above a reasonable industry and company level threshold from a foreign or domestic terrorism event;
* All commercial and all personal lines of insurance will be covered by the Pool.

The proposed Aon Plan is meant to be a long-term solution; however, features of this plan could be adopted in the TRIA debate as to a “reformed” backstop. Beginning the planning cycle for a long-term facility in 2006 would provide the industry and the economy as a whole with a start towards transitioning to a permanent solution for terrorism risk in the U.S.

Added Ehrhart, “None of the Aon Plan requirements are outside the realm of possibility. Many are key features of both TRIA and other public/private schemes.”

The National Symposium on the Future of Terrorism Risk Insurance takes place in the Cannon House Office Building, Caucus Room, United States House of Representatives in Washington, D.C. from 9 a.m. – 12:30 p.m. Aon is not a sponsor of this event, and is not currently scheduled to participate in the panel discussion.

Editor’s note: See related item in National news.