Exclusions Persist as Congress Debates Federal Terrorism Backstop Legislation

Nearly a year after the Sept. 11 terrorist attacks, the issue of federal insurance backstop legislation to protect carriers against future losses stemming from more attacks remains a crucial yet unresolved issue for the insurance industry—and for more and more commercial policyholders.

While some larger insurers continue to write such coverage, underwriting standards have become more stringent. Other carriers have begun excluding the coverage outright, pinning hopes on backstop legislation currently being hammered out by Congress.

Lack of coverage has begun affecting other sectors of the U.S. economy besides the insurance industry, notably real estate markets. According to the Mortgage Bankers Association of America (MBA), commercial real estate deals worth $3.7 billion have fallen through this year because necessary terrorism insurance was either inadequate or prohibitively expensive. In addition, real estate transactions worth $4.5 billion have been delayed or altered for the same reason.

The MBA conducted a survey in June of this year to determine whether its members’ lack of terrorism insurance had affected business; 44 percent of the survey’s respondents reported greater difficulty making loans on commercial properties. In 2001, $73.8 billion in commercial and multifamily property loans was originated by MBA members. So far this year, lending activity has slowed considerably. The association asserts that without a federal reinsurance backstop, commercial financing will continue to wither.

Lenders drive demand
More and more, lenders are driving demand for terrorism insurance, despite limited capacity. Jack Graham, senior property executive at the American International Group (AIG), explained the terrorism insurance product his company set up after Sept. 11, and how commercial lenders are requiring it.

“AIG came up with a product somewhat quickly,” Graham said. “We weren’t waiting for our partners in the market or the government to do anything. We put a product in as many people put exclusions in. What has really changed is, the product is selling pretty aggressively … But the buyers seem to be exclusively driven now by lenders. For the first couple of months—February, March, first part of April—it was property owners coming in to buy the coverage for their portfolio because they got an all-risk renewal from somebody with an exclusion. That slowed a bit, and then the lender market took over. I guess as those that are financed started to give renewal documents to their lenders with an exclusion, the lender drove them back out to buy a product.”

Graham noted, however, that even though AIG still offers terrorism coverage at limits similar to those prior to Sept. 11, some clients no longer qualify for the full amount: “It’s a stand-alone policy. We still have up to $150 million of capacity available for the right account. We’ve always had (the $150 million limit). What we do, though, is manage it depending on geography. We use a one-mile concentric circle concept. So there’ll be some parts of Manhattan, for example, that are full in terms of how much we’re willing to risk. So in cases where we think we’re full—I know that implies you have nothing left—we just offer less. We might offer only up to a $25 million maximum because we have another relationship with the client. They might have something else in our group, so we don’t want to turn them out completely. So we’ll just provide less in certain parts of Manhattan.”

Graham also pointed out that a few other large carriers offered similar products. “I wish I could tell you there was an abundance of capacity,” he said. “It’s probably the only product on the market from a property underwriter’s viewpoint that is not a competitive product.”

Congress to the rescue?
While AIG and others continue to offer terrorism coverage on a limited basis, other carriers are waiting to see what, if any, federal backstop legislation becomes law. Andrew Parmentier, vice president of Friedman Billings Ramsey’s economic and policy research group, explained, “For the most part, what you’re seeing right now is very much a wait-and-see approach. The odds of a terrorism backstop being created in Congress are up for a few reasons. I think the last time I wrote on the issue was a couple of months ago, and I kind of pegged the chances of a federal backstop being created at right around 45 percent. I think the odds now are 50-50 or slightly better, primarily because more members of Congress are convinced that the lack of insurance is broadly hurting the economy.”

Consensus on the importance of a backstop for the economy is one thing; Parmentier noted that rifts between the bills passed by the House and Senate represent the last, and potentially most daunting hurdle to final passage: “What you have are two bills that come from a pretty divergent philosophical base,” Parmentier said.

“The Senate-passed bill basically says this: The government would pay 90 percent of damages above the industry-wide deductible of $10 billion. If the industry-wide deductible is not reached, but one group suffers large losses, it could qualify for ‘taxpayer aid.’

“The House bill says the government would pay 90 percent of damages once the industry-wide deductible is reached, like the Senate bill. If the industry-wide deductible is not reached, but a firm suffers large losses, it could qualify for taxpayer aid. Very, very similar.

“One of the big issues, however … is that the Senate bill has no repayment to taxpayers,” Parmentier continued. “The House bill basically says that the industry would pay what amounts to the first $10 billion in damages, and amounts above this would be financed by an assessment on policyholders … The $10 billion, Republicans are saying, should be paid back to the government so that taxpayers are not on the hook.”

Parmentier explained, “The Senate bill doesn’t say anything about that. They’re just giving the money away, which is obviously good for the insurance industry. However, the Senate bill also says on the liability issue that the government would not pay punitive damages, but punitive damages would not be banned, which is something the trial lawyers had really pushed for.”

Topics Catastrophe Natural Disasters Legislation Market AIG