Copyright 2001 eMediaMillWorks, Inc.
(f/k/a Federal
Document Clearing House, Inc.)
Federal Document Clearing House
Congressional Testimony
October 30, 2001, Tuesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 3725 words
COMMITTEE:
SENATE COMMERCE, SCIENCE AND TRANSPORTATION
HEADLINE: TERRORISM RISK
TESTIMONY-BY: DIANE KOKEN, COMMISSIONER OF INSURANCE
AFFILIATION: PENNSYLVANIA
BODY: Regarding: The Role of the Federal Government
in Assuring that Insurance for Terrorist Acts Remains Available to American
Consumers
October 30, 2001
Testimony of Diane Koken Commissioner
of Insurance Pennsylvania
Introduction
My name is Diane Koken. I
am the Commissioner of Insurance for the Commonwealth of Pennsylvania, and I
also serve as chair of the National Association of Insurance Commissioners'
(NAIC) Northeast Zone comprising 10 states and the District of Columbia.
Speaking for myself and fellow members of the NAIC, we appreciate the
opportunity to testify regarding the potential role of the federal government in
making sure that
insurance against acts of
terrorism remains available to American consumers and
businesses.
Today, I want to make three basic points:
- First,
NAIC and its members believe there is presently a need for the federal
government, working with the state regulatory system, to provide appropriate
financial back-up to the private insurance market in order to assure that our
nation's economy does not falter due to a lack of
insurance
coverage for
terrorism. Although NAIC has not endorsed a
specific proposal for federal assistance at this time, we have adopted a set of
19 guiding principles that we believe should form the basis of any successful
federal program. A copy of the NAIC's guiding principles is attached at the end
of my testimony. - Second, we believe federal assistance should be a relatively
short-term solution to stabilize the commercial marketplace while it regains the
risk assessment and pricing equilibrium needed for private insurers to
underwrite
terrorism exposures. Thus, any federal
terrorism insurance program should be limited in scope and
duration.
- Third, a federal assistance program should maximize the use
of market forces to add efficiency and reduce the risk of losses from
terrorism and the potential costs to federal taxpayers.
The United States
Insurance System Remains
Fundamentally Sound
Let me start by saying that NAIC believes the
insurance industry is well-capitalized and financially able to withstand the
pressures created by the September 1 11th terrorist attacks, despite losses
projected to exceed $
30 billion. The United States insurance
industry is a $
1 trillion business with assets of more than
$
3 trillion. Preliminary loss estimates of $
30
billion to $
40 billion represent just 3 to 4 percent of the
premiums written in 2000.
America's insurance companies have time and
again shown their ability to respond to huge disasters and successfully recover.
Adjusted for inflation, Hurricane Andrew in 1992 caused $
19.7
billion in insured losses, and California's Northridge Earthquake in 1994 cost
$
16.3 billion in insured losses. As with previous disasters, we
believe insurers affected by the recent terrorist attacks will be able to pay
their projected claims, as they themselves have said.
Insurance is the
sale of a promise to pay claims when losses occur. As regulators, my colleagues
and I will continue monitoring the process to make sure that insurance promises
are kept. To do our job, we are backed by an impressive array of human and
technical resources, including the NAIC and fifty-one state insurance
departments that collectively employ more than 10,400 people and spend
$
910 million annually on insurance supervision. In addition, at
this time state insurance guaranty funds have the capacity to provide up to
$
10 billion to compensate American consumers in the event of
insurer insolvencies.
We would urge Congress to structure any federal
assistance program to take full advantage of the existing state regulatory
system. We have the mechanisms in place to monitor insurer solvency and handle
claims payment issues.
Congress Should Not Disrupt the Power of Private
Market Competition
The international commercial property/casualty
insurance market is very powerful, dynamic, and competitive. As a free market,
it responds to new information quickly, and sometimes with great volatility.
Like the stock exchanges, insurance market participants often react in unison to
reach the same conclusion at the same time with regard to what products are
viable and profitable, meaning that the price and availability of specific
products will rise and fall in conjunction with the industry's collective
willingness to sell A
them. Substantially negative information, such as
the September 11'" terrorist attacks,
can disrupt the entire market
until new information becomes available that makes insuring terrorist risks
acceptable.
Given sufficient time to adjust, however, the commercial
insurance market has found ways in the past to assess and insure extremely large
and difficult risks that were initially considered uninsurable. During the
1980's and 1990's, the insurance industry weathered enormous financial losses
from asbestos, medical malpractice, and environmental pollution claims against
corporate policyholders that were not foreseen by insurers. In those instances,
insurers said they had not reasonably expected to be held responsible for such
colossal claims, and therefore had not collected sufficient premiums or
established sufficient loss reserves to cover them.
In the short term,
the insurance market responded to huge environmental exposures with policy
cancellations, coverage limitations, exclusions, and increased prices, as is
being threatened now with regard to terrorism risk coverage. In the longer term,
coverage for these risks became available through a combination of aggressive
risk management, selfinsurance, captive insurance pools, other alternative
risk-sharing mechanisms, and renewed interest by commercial insurers as they
gained confidence in their abilities to adapt their policies and pricing to a
level where they could underwrite the business profitably. Ultimately, the
creativity and competitive discipline of the market overcame
its initial
period of contraction and volatility to provide viable insurance solutions for
enormous risks that were previously considered uninsurable.
The business
of insurance is about measuring risks and selling promises to cover them at a
reasonable profit. Insurance experts who perform these tasks are exceptionally
talented. Over time, they have demonstrated a remarkable ability to adapt to
unforeseen circumstances, while making available the insurance products that are
essential to the growth and productivity of American business. As expected in a
free competitive market, individual companies may stumble, falter, and even fail
when substantial adversity strikes, but the United States insurance industry as
a whole has a long and proud record of finding ways to overcome new obstacles
while advancing its business goals and serving the interests of the
insurance-buying public.
Thus, the NAIC believes Congress should begin
its consideration of federal assistance to the insurance industry by recognizing
the strength and adaptability of the private insurance markets. Federal actions
that unduly disrupt or interfere with private market forces are likely to end up
causing more harm than good for American consumers and federal taxpayers.
Appropriate Federal Government Action Can Help the Private Market
Recover
State regulators know from their own experiences that government
action can help the insurance market recover when it becomes overwhelmed by
changing risk factors or catastrophic losses. When the psychology of the market
results in industry reactions that harm the public, government has unique powers
to alter the insurance marketplace for the benefit of consumers. We have found
that successful government assistance involves tailoring actions to fix specific
problems and keeping the program as narrow as possible.
Hurricane Andrew
provides a useful example of limited government intervention that works.
Following the tremendous losses from this hurricane in 1992, commercial
reinsurers restricted their coverage for windstorms and raised prices. This
caused a
corresponding reaction from primary insurers, who moved to
raise prices, cancel coverage for coastal properties, and increase deductible
amounts for consumers having significant hurricane exposure. Within a couple of
years, normalcy returned to the reinsurance market, and then to the primary
market. The Florida Insurance Department assisted with the recovery of the
industry by introducing a moratorium on policy cancellations and beginning the
discussion of the need for a state catastrophe pool. The Florida legislature
later adopted a Hurricane Catastrophe Insurance Pool that provides a state-based
backstop for catastrophic windstorms in Florida. These collective actions have
resulted in a robust and competitive market for homeowners insurance in the
State of Florida.
In the present situation, we believe the federal
government can add certainty to the market for
terrorism
insurance using its unique powers. For example, Congress can establish
a uniform national definition of "
terrorism" so that everyone
is very clear what will trigger
insurance coverage for acts of
terrorism. Providing a temporary financial back-stop for
terrorism insurance coverage is another useful step, as long as
it does not allow what some have called "cherry picking" by insurers seeking to
have the government cover just the most risky policies.
State
insurance regulators believe the current situation affecting
the availability of
insurance for acts of
terrorism is similar in nature to other catastrophic events.
Due to the magnitude and unpredictable nature of terrorism as it is currently
perceived by insurers, a temporary level of federal assistance to spread risk
appropriately should provide time for the marketplace to adjust its thinking
about how insurance coverage for terrorist acts should be handled. If the
federal government and business customers make quick progress in lessening
exposure from acts of
terrorism, the insurance industry may
start providing the coverage American businesses and families demand. Enacting a
temporary federal solution will provide the necessary time to craft a more
thoughtful long-term solution.
Important Market Factors for Congress to
Keep in Mind
As Congress considers what type of federal assistance may
be appropriate to steady the commercial market while it adjusts to new demands,
the NAIC recommends that you keep in mind three very important factors. These
factors will greatly affect the costs of any federal program, as well as its
lasting impact on America's consumers and private insurance markets.
First, risk management precautions that reduce the likelihood of losses
from terrorist attacks will have a large impact on the willingness of private
insurers to offer
terrorism insurance coverage to customers.
Risk management - meaning the implementation of safety and security measures to
prevent harm - is a standard part of insuring commercial and government
facilities that are most susceptible to terrorist attacks. Large firms have
professional risk management departments whose mission is to reduce a company's
exposure to potential accidents and intentional harm, thereby improving the
company's chances to get insurance at the lowest rates possible.
Following the September II1h attacks, government and commercial
facilities across America have added security measures to prevent acts of
terrorism and limit potential damages. As commercial risk managers review these
new precautions, it seems likely they will become more inclined to offer
terrorism insurance because the possibility and extent of
potential insured losses occurring will be greatly reduced. At that point, we
expect market forces will start working to fill the gap by making
terrorism insurance available through private industry.
The NAIC recommends that Congress build-in strong incentives for
insurers or companies receiving federal assistance to implement and maintain
effective risk management measures to prevent acts of terrorism from occurring.
In that way, the federal government will be building upon standard risk-reducing
steps that are wellaccepted in the private marketplace for insurance products.
Second, the private market instills policyholder discipline to avoid
insurance claims through the concept of co-insurance. Co- insurance means that
policyholders are liable to pay part of any losses covered by insurance before
expecting a recovery from an insurer. Obviously, the higher the dollar amount
covered by the policyholder himself, the greater will be his incentive to take
steps to avoid losses. This concept to commonly understood by everyone owning a
car or a home who agrees to bear the cost of a "deductible" before receiving
payment from an insurance company.
Co-insurance should be considered by
Congress as an important market discipline tool that works equally well with
government programs.
Third, the scope and duration of any federal
assistance program will itself become a factor in the private insurance market.
Even though Congress is considering special government assistance intended to
operate as a supplement to normal business channels, the very fact that
government will pay certain costs of a commercial business becomes a factor to
be taken into account when private market decisions on
terrorism
insurance are made.
The NAIC urges you to keep in mind that
federal government policy regarding
terrorism insurance
assistance will not occur in a vacuum. It will become a private market
consideration affecting prices and availability of
insurance,
and it may impact
insurance products having nothing to do with
terrorism. The extent of the federal influence on private
market
insurance products can be expected to be directly
commensurate with the size, details, and length of the federal assistance
program.
State Actions Are Not Driving the Market Demand for
Terrorism Insurance The NAIC and its members have
recently been asked to explain how requirements of state law impact the market
demand for
terrorism insurance. Many people in Congress
apparently think that states require private businesses to carry
insurance against
terrorism, and that failure
of the private
insurance market to offer
terrorism coverage will result in
violating state laws
and regulations. We believe there is a misunderstanding of what state laws
require and what state insurance regulators do.
Let me say clearly that
states do not drive the private market for
terrorism insurance.
To our knowledge, no state currently requires that business entities maintain
insurance against acts of
terrorism. In fact,
the NAIC recently performed an electronic search of state laws and regulation
for references to "
terrorism". We found nothing.
Furthermore, it is important to understand that state
insurance regulators do not normally get involved in the
details of property/casualty insurance policies for large business operations.
These are considered to be the product of free market negotiations among
sophisticated insurance underwriters, brokers, and professional corporate risk
managers who rely upon the traditional powers of buyers and sellers to bargain
for the best deal they can get. The state regulatory interest in such large
transactions is mainly that they not impair the overall financial health of an
insurer, since monitoring insurer solvency is a major responsibility of
regulators.
Banks and investors typically use their private market
influence to require that large business and government entities maintain
adequate property/casualty insurance coverage against foreseeable harm. As a
result of September I 11Th, foreseeable harm may now start to include possible
terrorist acts in addition to normal hazards. However,
terrorism coverage would usually be just one part of a
comprehensive
insurance package that insurers want to sell.
Their desire to avoid terrorist risk exposures may be offset by their need to
include it in order to sell a package of insurance coverage judged to be
profitable overall.
State Actions Having a Limited and Indirect Impact
on
Terrorism Insurance What, then, is the impact of
state laws on
terrorism insurance? Primarily, it falls into
three areas - workers' compensation requirements, policy form regulations, and
rate regulations. We believe these areas have a limited and indirect effect upon
the price and
availability of terrorism coverage in commercial
property/casualty policies for large business projects that significantly affect
the American economy.
It is important to recognize that states do not
initiate market requirements in these areas, but only react to market forces
that threaten to deny consumers fair insurance coverage. In normal practice, for
example, an insurer would ask a state regulator for permission to exclude a
specific type of coverage, such as terrorism, when the insurer issues a policy
to customers. The regulator may have general authority under state law to deny
the insurer's request for the coverage exclusion as a matter of public policy,
and thus force the insurer to include
terrorism coverage when
it sells an
insurance policy. However, the insurer makes the
ultimate decision as to whether it will offer an insurance policy at all, and
can refuse to offer
insurance policies in the state if
terrorism coverage is not excluded. If enough insurers threaten
to withdraw from a state's
insurance market, state regulators
will be under tremendous pressure to grant an exclusion for
terrorism in order to keep insurers in the market providing
other types of
insurance. Workers' Compensation
Requirements
State workers' compensation laws were developed early in
the 20th Century. In the late 1800's and early 1900's, the number of
occupational injuries and illnesses occurring in the American workplace was
hindering the Industrial Revolution. Businesses were asking how they could
assure that working men and women who are injured on the job get the care they
need, while protecting industry and commerce from the financially crippling and
demoralizing prospect of employees suing their bosses for every work-related
injury. The question was answered with the state workers' compensation system,
which covers employees' medical expenses and lost wages for work-related
injuries and disease, regardless of who was at fault. In return, employees are
limited to the benefits provided by the workers' compensation system as their
exclusive remedy.
State workers' compensation laws require a set of
benefits that are guaranteed by employers to their employees who are injured on
the job. Insurers play a key role in the delivery of the benefits promised by
employers. Typically, insurers assume by contract the obligation to provide the
employer's share of medical benefits, rehabilitation benefits, and survivor's
benefits in exchange for premiums the employer pays the insurer. Since state law
obligates the employer - and therefore the insurer that has assumed the
employer's obligations - to provide the benefits specified in a state's Workers'
Compensation Act, the insurer cannot introduce either an exclusion for war or an
exclusion for terrorist acts.
As a no-fault safety net for workers'
injuries on the job, state workers' compensation laws do not permit coverage
exclusions as a matter of public policy. Workers' compensation insurance is one
part of the commercial coverage maintained by significant employers.
State Policy Form Regulations
Many states have statutory
authority over insurance contract language through general policy form
regulations. These requirements typically prohibit contract language that is
misleading, illusory, inconsistent, ambiguous, deceptive, or contrary to public
policy. Since no currently enacted state laws specifically prohibit an insurer's
request to exclude coverage for terrorist acts, states would have to rely upon
the general provisions above if they seek to deny an insurer's request to
exclude terrorism coverage. Under state law, an adverse regulatory decision can
be challenged by an insurer through the state insurance department's
administrative process, with the right of appeal to state courts.
State
insurance regulators are also charged with solvency oversight of insurers. Thus,
an action to deny an exclusion of terrorist activities under general policy form
provisions could cause financial difficulties for insurance companies. However,
it is ultimately the insurer's choice whether to provide coverage for a
specific business event or peril. Primary insurers may be hesitant to
exclude coverage for terrorist acts because they know their business and
individual customers will want assurances that the coverage is provided.
Reinsurers do not directly deal with businesses and families, and therefore do
not face the same pressures to provide terrorism coverage.
State Rate
Regulations
State rate regulations are primarily focused on protecting
small businesses and individual policyholders. For commercial lines insurance
products, only 13 states still require that the insurance department exercise
prior approval requirement for most rate changes. The remaining 38 jurisdictions
have some form of competitive rating mechanism that allows insurers to file and
use rates, or use them even before they are filed with insurance regulators.
Moreover, in recent years insurers have been successful in convincing state
legislatures to create rate regulation exemptions for large commercial
policyholders. The NAIC does not believe that state rate regulations are
preventing insurers from charging adequate rates for
terrorism
insurance. Conclusion
The NAIC and state regulators
believe the
insurance industry remains strong, and that it
retains tremendous strength to recover from the September 11 '" attacks and
adjust its
business practices to new conditions in the marketplace.
State insurance regulators are working together to help assure that any glitches
which occur do not disrupt the process of getting people's lives back in order
and America's businesses back to work. The NAIC and its members plan to work
closely with Congress and fellow regulators, as set forth in the
Gramm-Leach-Bliley Act, so that the needs of individual Americans and our
Nation's economy are met in a timely way.
LOAD-DATE: October 31, 2001