House passes Baker-sponsored terrorism insurance legislation

Thursday, November 14, 2002

WASHINGTON -- The U.S. House of Representatives voted late today in favor of a House-Senate compromise bill on terrorism insurance, almost a year after initial House passage of the legislation sponsored by Capital Markets subcommittee chairman Rep. Richard Baker, R-Baton Rouge.

The ”Terrorism Risk Protection Act” (H.R. 3210) provides for a short-term federal backstop against potential insured losses due to future terrorist attacks.

While property-and-casualty insurers were able to cover obligations for the estimated $40 billion damages related to the terrorist attacks of last September 11, the availability and affordability of terrorism insurance for businesses has become increasingly problematic, with reinsurance companies either refusing to back policies or causing insurers to charge dramatically higher premiums.  The shortage of coverage has put a drag on certain economic activity, particularly slowing new construction deals.

“This is a responsible approach to help keep our country building, our economy growing, and our hard-hats working,” Baker said.  “When we began this debate a year ago, I spoke about the need, when it comes to terrorism insurance, to lend a helping hand but not give a handout, to construct a backstop and not a potential taxpayer bailout.   And I pointed to three guidelines for principled legislation – that it should be a temporary backstop, have a firm government exit strategy, and protect taxpayers with repayment for their assistance.  And I'm happy to say we've done just that."

Key features and insurance-related provisions of the House-Senate agreement on terrorism insurance:

Program Parameters

·         The Terrorism Risk Insurance Act establishes a Federal backstop to protect against the risk of future catastrophic terrorist losses in the commercial property and casualty insurance marketplace.

·         The Act is triggered when the Secretary of the Treasury, in concurrence with the Secretary of State and the Attorney General, certifies that a terrorist act has occurred causing at least $5 million of covered insured losses in the United States.

·         The backstop lasts for 3 years, terminating on December 31, 2005.

·         State insurance pools and funds are protected with the Federal backstop; the Treasury has discretion to apply the Act to various classes of captives and self-insurance programs.

·         Coverage for almost all lines of commercial property casualty insurance is provided, including workers compensation (for both terrorism and war) and business interruption, for all U.S. risks, including the U.S. territorial sea and continental shelf.

·         The Treasury is directed to study the group life insurance marketplace, and include group life insurers in the backstop to the extent that group life insurance is not reasonably available to consumers.  Treasury shall separately study the availability of terrorism coverage for other lines of insurance, including personal lines.

 

Cost Sharing Formulas

·         Each insurance company will be responsible for paying out a certain amount of insured losses –  a deductible – before Federal assistance becomes available.  This deductible is based on a percentage of the insurer’s direct premiums for covered commercial property-casualty US risks.  Insurers’ deductibles are 7% in 2003, 10% in 2004, and 15% in 2005.  Example: if a terrorist event occurs in 2004, an insurer with $1 billion in direct premiums would have to pay the first $100 million in insured losses before the Federal backstop would kick-in.

·         The Federal backstop pays 90% of insured losses in excess of an insurer’s deductible, while the insurer retains 10% of its insured losses above the deductible.

·         There is a special transition period for the remainder of 2002, with a 1% insurer deductible, 90-10% Federal/private cost-share, and terrorism exclusions temporarily invalidated; insurers (after providing required notice) can offer the policyholder the choice of an immediate reinstatement of the exclusion, an adjusted premium, or cancellation of coverage. 

·         Insurers may reinsure their insurer deductibles and vertical co-shares.

·         Losses covered by the program will be capped at $100 billion; after insurers have paid their deductibles and pro-rata share of the $100 billion, Congress determines the procedures and source for any additional payments.

 

Taxpayer Protections

·         The insurance marketplace retains the first layer of losses in the amount of $10 billion in year 1, $12.5 billion in year 2, and $15 billion in year 3; Federal assistance within the retention that is not subsumed by insurer deductibles and 10% co-shares must be recouped; additional amounts may be recouped based on economic factors in the judgment of the Secretary.

·         Mandatory payback/recoupment within the insurance marketplace retention is through terrorism loss risk-spreading premiums (surcharges) paid by all commercial p/c policyholders, based on a percentage of premium rates, with any year’s surcharge capped at 3%.

·         Treasury has discretion over the timing of recoupment, and to adjust any amounts for urban, smaller commercial, and rural areas without lowering the total amount of payback, as well as for different lines of insurance or to avoid insolvencies. 

·         Treasury may assess civil penalties on participating insurance companies for submission of false or misleading information or failure to make required repayments.

·         Affiliated insurers are treated as a consolidated entity for calculating direct premiums.

 

Consumer Protections

·         Insurers providing commercial property and casualty insurance are required to participate in the program.  Insurers must offer terrorism insurance to all policyholders during the first two years of the program.  The Secretary has discretion to extend this requirement in the third year of the program.

·         Insurers must disclose to policyholders the premiums that they charge for terrorism coverage and the existence of the Federal backstop.

·         Insurers must submit premium and claims information to the Secretary who may investigate and audit all claims under the program.

·         Insurers must certify insured losses and their compliance with the Act before receiving Federal assistance.

·         State regulatory authority is generally protected; however, until the end of 2003, State prior approval authority is preempted for rate and form changes necessary to allow the Federal requirements to take effect

U.S. House Privacy Policy

Home     Recent News     Offices     E-mail     Links     District Map     Biography