WEISS RATINGSTerrorism Insurance Proposals Have Negative Repercussions
for Taxpayers and Consumers
|Weiss Recommends Following UK Model with Limited Government Role|
PALM BEACH GARDENS, Fla., November 12, 2001 -The four proposals for terrorism insurance currently under consideration will have negative repercussions for taxpayers, consumers, or both, according to Weiss Ratings, Inc., the only independent provider of ratings and analyses of the insurance industry. Weiss analyzed plans proposed by the Bush Administration, the insurance industry, the Senate Banking Committee, and the US House of Representatives (Oxley-Baker), as well as the existing system in the United Kingdom.
"Our conclusion is that the proposals for terrorism coverage on the table today pale by comparison to the UK model," said Martin D. Weiss, Ph.D., chairman of Weiss Ratings, Inc. "We propose the UK model as a starting point for terrorism insurance with the federal government restricting itself to the insurer of last resort." The UK's pool reinsurance system is structured with five layers of funding or coverage with only the very last using taxpayer dollars.
The Proposed Plans and Weiss Ratings' Analysis
"Terrorism coverage will invariably result in higher premiums, regardless of the proposal that is adopted. The challenge is to formulate a plan that places the least cost burden on taxpayers, gives policyholders continuity of coverage, and still allows the market to play a key role so insurers can earn a profit," commented Dr. Weiss.
The Insurance Industry would like the government to pay all claims in the first year plus all claims in subsequent years until a national pool is capitalized at $10 billion. The insurance industry would be responsible for damages only after the pool is fully capitalized, and only up to 80% of the claims. However, as Weiss' analysis shows, since there is no cap on the amount the government will have to lay out to cover terrorist attacks in the first year, the potential burden to taxpayers is, therefore, excessive.
The Bush Administration favors a three-year, stop-gap measure that subsidizes the industry until a long-term plan is in place. In year one, the government pays 80% of the first $20 billion of losses and 90% of the next $90 billion. In year two, after the first $10 billion is paid out by the industry, the government pays 50% of the losses between $10 billion and $20 billion, then 90% of the losses over $20 billion. In year three, after the first $20 billion is paid out by the industry, the government pays 50% of the losses between $20 billion and $40 billion, then 10% of the losses over $40 billion. Depending on the timing and nature of any future attacks, Weiss contends, this proposed plan could potentially prove even more burdensome to the taxpayer, with the government committing up to $97 billion in the first year, and possibly unlimited amounts in the second and third years.
The Senate Banking Committee also proposes a three-year, stop-gap plan whereby insurers would pay the first $10 billion in losses in each of the three years, while the government would step in and pay 90% of the remaining claims. According to Weiss, since the insurers would be fully responsible for up to $10 billion each year, this proposal would discourage the industry from offering any coverage, with negative consequences for consumers who would be left with greatly diminished choices and/or potentially skyrocketing premiums.
The House Finance Services Committee approved by voice vote a one-year measure whereby the government would loan the industry funds to cover 90% of any claims greater than $1 billion and would impose a special assessment on policyholders to defray the costs of claims over $20 billion. Weiss anticipates that this bill, along with a longer term plan anticipated next year, would have an impact similar to that of the Senate Banking Committee's proposal.
"All the current proposals put a huge burden on the taxpayer, and all of the government proposals are short-term, stop-gap measures that do little more than address the immediate concerns with inadequate attention to long-range consequences. Full government subsidies, even in the short term, provide little incentive for the industry to properly absorb and price the risk of terrorism, thus adding to the potential taxpayer bailout," said Dr. Weiss.
Elements of the Weiss Ratings Recommendation
Weiss proposes the UK Pool Reinsurance model as a starting point for any future US programs. The UK pool was overhauled in 1993 in response to the withdrawal of private reinsurance coverage from the market, following a series of terrorist incidents. The layers of coverage and funding are as follows:
Weiss proposes using this model as a starting point and adding four key elements for the US: 1) actuarially sound rates that lead to price stability; 2) a clear definition of terrorism that addresses direct as well as peripheral damage; (3) a precise delineation of what constitutes single versus multiple occurrences; and 4) a requirement that insured companies maintain a defined level of risk management procedures in place to protect themselves against terrorist attacks.
"The first line of responsibility must be on the insured company. Once that is firmly in place, it's fair to spread the risk as widely as possible, with the insurance industry acting as the second buffer, and the government acting strictly as an insurer of last resort," said Dr. Weiss.
Weiss issues safety ratings on more than 15,000 financial institutions, including HMOs, life and health insurers, Blue Cross Blue Shield plans, property and casualty insurers, banks, and brokers. Weiss also rates the risk-adjusted performance of more than 11,000 mutual funds. Weiss Ratings is the only major rating agency that receives no compensation from the companies it rates. Revenues are derived strictly from sales of its products to consumers, businesses, and libraries.
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