Insurance.

Few property owners can say that word without at least a small adverse reaction. On top of general property, casualty and liability, there are special fire, flood and earthquake policies. All are expensive, and few truly cover losses when disaster strikes.

Now, however, terrorism insurance must be added to the list. And proposals currently being considered by the U.S. Congress stand to radically increase the cost of property insurance, both directly through policy premiums or indirectly in the form of taxation.

While the concept of terrorism insurance is somewhat new to the United States, our cousins across the pond in the United Kingdom have carried terrorism riders for decades. So Weiss Ratings, an independent provider of ratings of the insurance industry, compared the four proposals now under consideration with the current British solution.

The result? According to Weiss Ratings, the U.S. government should stop trying to reinvent the wheel and instead take a lesson from the Brits.

"Our conclusion is that the proposals for terrorism coverage on the table today pale by comparison to the U.K. model," said Martin Weiss, chairman of Weiss Ratings. "We propose the U.K. model as a starting point for terrorism insurance with the federal government restricting itself to the insurer of last resort.

"Terrorism coverage will invariably result in higher premiums, regardless of the proposal that is adopted. The challenge is to formulate a plan that places the least cost burden on taxpayers, gives policyholders continuity of coverage, and still allows the market to play a key role so insurers can earn a profit," Weiss added.

Each proposal now before the Congress takes a fundamentally different approach.

Insurance Industry Proposal

The industry wants the federal government, a.k.a. Joe and Joanne Taxpayer, to pay all claims in the first year plus all claims in subsequent years until a national pool is capitalized at $10 billion. The insurance industry would be responsible for damages only after the pool is fully capitalized and only up to 80 percent of the claims.

Weiss Ratings points out that this plan places no cap on the amount the government will have to lay out to cover terrorist attacks in the first year, making the potential burden to taxpayers excessive.

The Bush Plan

In contrast, the Bush administration's plan is essentially an insurance industry bail-out. This three-year, stop-gap measure would subsidizes the industry until a long-term plan is in place.

In year one, the government would pay 80 percent of the first $20 billion of losses and 90 percent of the next $90 billion. In year two, after the first $10 billion was paid out by the industry, the government would pay 50 percent of the losses between $10 billion and $20 billion, then 90 percent of the losses over $20 billion. In year three, after the first $20 billion was paid out by the industry, the government would pay off the losses between $20 billion and $40 billion, then 10 percent of the losses over $40 billion.

But Weiss Ratings shoots this plan down as well. Depending on the timing and nature of any future attacks, Weiss contends, this proposed plan could potentially prove even more burdensome to the taxpayer, with the government committing up to $97 billion in the first year, and possibly unlimited amounts in the second and third years.

The Senate Banking Plan

The Senate Banking Committee also proposes a three-year, stop-gap plan whereby insurers would pay the first $10 billion in losses in each of the three years, while the government would step in and pay 90 percent of the remaining claims.

According to Weiss, since the insurers would be fully responsible for up to $10 billion each year, this proposal would discourage the industry from offering any coverage, with negative consequences for consumers who would be left with greatly diminished choices and potentially skyrocketing premiums.

The House Proposal

The U.S. House Financial Services Committee approved by voice vote a one-year measure. Under this plan, the government would loan the industry funds to cover 90 percent of any claims greater than $1 billion and would impose a special assessment on policyholders to defray the costs of claims over $20 billion. Weiss anticipates that this bill, along with a longer-term plan anticipated next year, would have an impact similar to that of the Senate Banking Committee's proposal.

"All the current proposals put a huge burden on the taxpayer, and all of the government proposals are short-term, stop-gap measures that do little more than address the immediate concerns with inadequate attention to long-range consequences," Weiss said. "Full government subsidies, even in the short term, provide little incentive for the industry to properly absorb and price the risk of terrorism, thus adding to the potential taxpayer bail-out."

The UK Approach

So how is the United Kingdom's system different? That country's pool reinsurance system is structured with five layers of coverage, with only the very last using taxpayer dollars. The U.K. pool was overhauled in 1993 in response to the withdrawal of private reinsurance coverage from the market, following a series of terrorist incidents.

Here's how it works. The insurance company pays the first £100,000 per coverage type, with no government reimbursement. Insurers contribute premiums to fully capitalize and maintain and national pool, paying out all claims directly from the pool once the deductible is met.

If losses exceed the funds available in the pool, the industry is assessed up to an additional 10 percent of current year premiums. Losses beyond that 10 percent are covered by the pool's investment income.

After all of these sources of funding are exhausted, the government will help cover costs. Since the pool's creation in 1993, that has never happened.

"The first line of responsibility must be on the insured company. Once that is firmly in place, it's fair to spread the risk as widely as possible, with the insurance industry acting as the second buffer, and the government acting strictly as an insurer of last resort," Weiss said.

For more articles by Lesley Hensell, please press here.

Published: November 15, 2001

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Lesley Hensell covers commercial real estate and financial issues for Realty Times. Based outside of Dallas, Lesley works with high-tech and real estate clients as an independent marketing and public relations consultant. She also writes for several publications, including the Dallas Morning News. E-mail Lesley at: lhensell@earthlink.net