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RMS: U.S. Should Extend Insurers' Terrorism Backstop

Posted on 24 Jul 2009

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The Obama administration's plan to reduce the federal subsidy to terrorism-risk insurers will probably trigger volatility in the insurance market, said an executive at Risk Management Solutions Inc.

"Is this a government handout? No it’s not," said Peter Ulrich, senior vice president at Risk Management Solutions Inc., at the firm’s “Quantifying Terrorism Risk under the Obama Administration” conference yesterday in New York. Risk Management Solutions in Newark, California, provides models for insurance companies.

President Barack Obama’s 2010 budget calls for a cutback in the subsidy under the Terrorism Risk Insurance Act. The law, enacted after the Sept. 11, 2001, attacks, repays insurers if extremists strike again. The administration has said that reducing the subsidy will encourage the private sector to “better mitigate terrorism risk” by “developing alternative reinsurance options and building safer buildings.”

Without the government subsidy, more than 80 percent of current providers will no longer offer terrorism-risk insurance, said Aaron Davis, managing director with Aon National Property Brokerage, in an interview. Chicago-based Aon Corp. is the world’s largest insurance brokerage.

“The insurance industry is highly distressed,” said Davis. The call for scaling back the act will have “very negative consequences.”

The federal government covers 85 percent of an insurer’s losses after claims from a terrorist event exceed $100 million and the company pays deductibles equal to 20 percent of its annual commercial premiums. The program is capped at $100 billion in total losses. Congress and the Treasury Department may grant reimbursements beyond the cap.