Position on a Long-Term Solution to Terrorism Exposure: A Special Message from the Risk and Insurance Management Society, Inc

Risk Management, May 2007 | Go to article overview

Position on a Long-Term Solution to Terrorism Exposure: A Special Message from the Risk and Insurance Management Society, Inc


RIMS has been at the forefront of the introduction, adoption and extension of the Terrorism Risk Insurance Act. Our members have testified before Congress, and we have brought our message personally to Capitol Hill. With this vital legislation set to expire on December 31, 2007, RIMS issued the following position statement this past December. We will continue to work closely with leaders in Congress, as well as industry partners, to ensure that there continues to be a federal back stop to terrorism exposure in the United States beyond 2007.

POSITION ON A LONG-TERM SOLUTION TO TERRORISM EXPOSURE

Terrorism is one of the largest and least predictable catastrophic exposures for businesses. The Risk and Insurance Management Society, Inc. (RIMS), the largest association of risk managers in the United States, is very concerned about the fast-approaching expiration date of the Terrorism Risk Insurance Act (TRIA) on December 31, 2007 without any long-term successor program in place. Without the stability offered by a permanent long-term solution, our members are faced with an uncertain and costly marketplace that is not equipped to assist in the protection and sustainability of our country's assets. Accordingly, something must be done to ensure that terrorism insurance continues to be available to buyers of commercial insurance in a comprehensive and affordable manner once TRIA expires. Time is of the essence. RIMS is prepared and willing to work with public and private organizations to develop a solution or consensus opinion in order to have a unified approach before Congress.

There are a number of proposals that have been issued by the insurance industry and from representatives of the real estate and financial services markets. RIMS membership includes representatives of all of these industries, as well as businesses across the broad spectrum of the economy. Through ongoing discussions and polling of our membership, RIMS has identified critical factors that should form the foundation of any solution. Therefore, rather than endorsing a particular plan or developing one of our own, RIMS embraces four principles that we feel should underlie any plan that is adopted.

1. RIMS members believe that a private/public partnership provides the best alternative to addressing the long-term needs of availability and affordability of insurance to cover acts of terrorism.

While RIMS members' first choice would be a complete private market solution to cover acts of terrorism post TRIA, the last four years have demonstrated that the private insurance market alone will not be able to respond to provide adequate coverage for terrorism exposures. Acts of terrorism are too difficult to predict and are, therefore, too difficult to price. To be insurable, expected losses must be reasonably estimable, and terrorism losses simply do not fit this criterion. For this reason, the private market has not provided coverage without the federal government acting as a reinsurer of last resort. With federal government participation there is at least some level of certainty for private carriers in predicting their maximum exposure. Some form of risk pooling may be an appropriate approach. Also, financial incentives and eligibility for participation in the program should be considered to encourage creation of private insurance capacity. Regardless of the private market involvement, the federal government will likely be required to continue to be involved in a reinsurance capacity at some level with the scope of involvement possibly decreasing over time. Notwithstanding the statement from the President's Working Group on Financial Markets that TRIA legislation has prevented the emergence of new financial capacity for terrorism coverage, RIMS believes the opposite--that the capacity that is currently available is a direct result of TRIA. RIMS believes that absent some form of federal backstop, there will never be sufficient capacity available to cover those businesses that require the highest policy limits. …

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