Though a recent U.S. Treasury Department report recommended against reauthorizing the federal terrorism insurance backstop unless it was scaled down significantly from its current form, the nation's largest life insurance association is lobbying to both extend and expand the program to cover group life insurance.
According to Frank Keating, president and chief executive officer of the American Council of Life Insurers, because group life policies are not covered by the three-year-old federal Terrorism Risk Insurance Act, writers of group life have seen the private market for catastrophe reinsurance evaporate since the Sept. 11, 2001 terrorist attacks. This has left life insurers in the "precarious position of choosing to remain in the marketplace without a reinsurance backstop or exiting from the market all together," Keating said in a statement.
"Unlike the property and casualty industry, in the absence of TRIA, group life insurers are required by state law to offer terrorism coverage if they offer the product," Keating said. "As a result, group life insurers have been making changes to mitigate factors within their control. They are adjusting underwriting factors and working to control risk concentrations. However, despite these efforts, terrorism is and will remain an event that cannot be predicted with any degree of certainty, frequency or severity."
Under the TRIA program, which is set to expire at year end, the federal government will provide certain coverage for "certified" acts of terrorism -- those that cause at least $5 million in damage and are committed by foreign interests -- that result in claims on commercial property, business interruption, workers' compensation and general liability lines of business.
Reinsurance is provided for 90% of losses, to a cap of $100 billion, on events that cause total damage in excess of 15% of the entire industry's prior-year commercial property and casualty direct earned premium, which is estimated to be between $15 billion and $20 billion for 2004. If a terrorist attack fails to exceed the industrywide retention, then the government will provide "temporary liquidity" to those companies whose losses exceed 15% of their prior year's direct earned premiums, but the program requires those companies to repay those funds over time.
TRIA specifically excludes life insurance, as well as health insurance and personal lines property and casualty insurance. When initially passed, the Treasury Department was asked to evaluate the market conditions affecting group life and determine whether it should be included in TRIA. In August 2003, the department reported that, although there was a general lack of catastrophic reinsurance for group life coverage, it found "no appreciable reduction in the availability of group life insurance coverage for consumers" and recommended against including it in the program.
"This decision is the result of a careful consideration of market conditions, with significant input from users and providers of group life insurance," said then-Assistant Treasury Secretary for Financial Institutions Wayne A. Abernathy, at the time. "We were pleased to find that group life insurance companies have stayed with their customers and continued to make group life insurance available on much the same terms as before the terrorist tragedies of Sept. 11. However, Treasury will continue to monitor conditions and developments in the market for group life insurance."