Terrorism backstop could have negative impact: S&P report

The terrorism insurance bill reportedly close to being put forward in the U.S. could have a negative impact on company ratings, suggests a new report from Standard & Poor’s.
The report says that if the federal government indeed steps in to offer terrorism reinsurance, this might “tempt” insurers into accepting inadvisable exposure and cast doubt on ratings. “The concern is some insurers could use federal backing as a crutch,” says Fred Loeloff, S&P director for insurance ratings.
The report notes, while there is evidence a backstop would benefit the overall U.S. economy, insurers have since September 11 reduced their exposure to terrorism. Reversing this policy could be dangerous for insurers in the long term, causing them to rely on the government backstop. Further the backstop may induce some states to reinstate the requirement for terrorism coverage that had been withdrawn in light of September 11.
“Our sensitivities will be increased because companies will, either by mandate or voluntarily, be exposed to terrorism risk,” says Steve Dreyer, S&P managing director. The report notes that ratings are based in part on an assessment of insurers’ abilities to manage risk without reliance on such a government backstop.
At the end of last week, members of a joint congressional committee on terrorism insurance said that a compromise bill had been worked out. The key components of the bill require insurers to pay for terrorism losses up to 7% of written premium for the previous year and then 10% of losses beyond that 7% figure. For losses above the 7%, the government would pay 90%. For losses in excess of US$100 billion, Congress would have to decide on an ad hoc basis how to best deal with claims.
All commercial insurers will participate and will charge a 3% levy to pay for the program.
The program would last for three years, and the question remains where the market would stand at this point after insurers move back into offering the coverage.