Canadian Underwriter

Senate terrorism cover scheme cheaper than House option, study suggests

August 6, 2002   by Canadian Underwriter

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The U.S. Senate’s plan for a government terrorism reinsurance backstop would cost less than the House’s “loan” scheme proposal, says a new study by Tillinghast-Towers Perrin (TTP), commissioned by the American Insurance Association.
The Washington-based association, which represents more than 410 U.S. p&c insurers, asked for a comparison of Senate bill S2600 and House bill HR3210 in terms of cost over two years and consistent with the Congressional Budget Office’s (CBO) estimate of a terrorist attack costing US$4.5 billion. The CBO used this estimate in an earlier calculation of HR 3210’s costs, which TTP says is consistent with its findings.
The Senate program, which sees the government act as an excess reinsurer, would cost US$2.8 billion in disbursements over the next five years. The House plan, which is for loans to be repaid by insurers, would see US$6.61 billion over the next five years. Recovery of these loans over the same period would be US$1.36 billion, with only 60% of the loans recovered over the next ten years. The Senate plan has no such recovery scheme.
Taking into account both disbursements and recoveries, the study estimates a five-year net budgetary impact of US$5.25 billion from the House plan, and US$2.8 billion from the Senate plan, a difference of 80%.
“Federal disbursements are higher under HR 3210, due primarily to (a) the lower effective threshold at which payments to insurers begin and (b) the fact that once the threshold is met payments are “first dollar” rather than excess over a company retention,” the study concludes.
It also notes that although ultimately most of the money paid out under the House plan should be recoverable, given the extended amount of time this recovery would take, the net impact on the federal budget is greater.
Currently, a committee is being established with House and Senate representatives to reach a compromise bill.

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