ACLI Pushes For Federal Terrorism Insurance Backstop For Group Life
The entire life insurance industry faces a real threat of insolvency given the potential for terrorist events that would cause frequent, widespread mortality losses, the American Council of Life Insurers says.
In a formal letter to the Treasury Department on the issue of whether group life insurance should be covered by the federal Terrorism Risk Insurance Program, ACLI says terrorist risks, particularly nuclear, biological, chemical or radiological risk, pose enormous challenges for life insurers.
Pricing for this risk is not possible, ACLI says, because neither the likelihood nor severity of a terrorist attack can be actuarially predicted.
Moreover, as a matter of public policy, state insurance regulators do not allow insurance companies to exclude these risks.
“Since risk cannot be eliminated or capped in this context,” ACLI says, “a government terrorism risk insurance backstop is the only option to protect the long-term viability of the life insurance industry.”
The Financial Services Roundtable, Washington, joins ACLI in its support for including group life in the federal program.
“The core problem faced by the property-casualty industry is identical for group life providers: concentration of risk and lack of adequate catastrophic reinsurance,” the Roundtable says.
But the Consumer Federation of America, Washington, urges Treasury to demand extensive documentation from the life insurance industry on the need for taxpayer support for group life insurance.
“The case for expanding the (Terrorism Risk Insurance) Act to cover group life is very weak,” CFA says.
“Life insurers have provided absolutely no evidence that they cant prevent overexposure to terrorism risk by using a variety of risk-spreading measures,” CFA adds.
CFA notes that the National Association of Insurance Commissioners, Kansas City, Mo., which CFA describes as “generally very sympathetic to the needs of the insurance industry,” has refused to allow group life insurers to exclude terrorism risks.
But ACLI argues that if a government insurance backstop is not available when terrorist losses of a certain magnitude threaten the ruin of either the entire industry or a significant number of insurers, the consequences are severe.
First, ACLI says, the life insurance industry ceases to function, either entirely or in its ability to provide future group life coverage.
Second, ACLI says, the insurance market is dislocated to the extent that the risk of industry ruin impedes development of traditional risk-pooling mechanisms.
ACLI says the Sept. 11, 2001, terrorist attack profoundly changed traditional risk assessment, increasing the perceived value of catastrophe reinsurance at the same time that insurers have become unable to obtain at any price the levels of protection they previously enjoyed.
ACLI cites the example of Los Angeles County, where some $200 billion in group life is now in force.
That figure exceeds the entire surplus of the life insurance industry, ACLI says. “A concentrated attack on Los Angeles could prove ruinous.”
No one, ACLI notes, can predict the location and magnitude of another terrorist attack, but the risk of a given insurer being unable to pay benefits quickly without disrupting the capital markets is very real today.
And reinsurance, if available at all, is far more limited and expensive, ACLI says.
ACLI adds that it is quite concerned by the potentially uneven distribution of group life costs among different insurers.
This distribution, ACLI says, is partly random but is also a function of the concentration of risk that is an essential feature of group life insurance.
In a situation where the entire industry participates in a backstop arrangement, cost might be spread efficiently.
But absent such a situation, ACLI says, insurers are exposed to a level of risk that cannot be priced in a reasonable way.
There are thus two scenarios of losses that could ruin the life insurance industry, ACLI says.
The first, ACLI says, involves one or more calamities so widespread as to directly affect a significant number of insurers simultaneously.
The second, ACLI says, involves calamities so intense as to ruin one or more major insurers, driving them into insolvencies that cannot be borne by state guaranty funds.
The Roundtable says that group life offers substantial benefits to the work force.
First, it says, group life provides significant income security to average workers.
Second, the Roundtable says, because of its low cost, it is often the only life insurance coverage available to lower-paid workers.
Third, the Roundtable says, because no physical exam or other qualification is required, it is often the only life insurance available for individuals with serious pre-existing medical conditions.
Without a federal backstop, the Roundtable says, the effect of the Sept. 11 attack will be reduced coverage or sharply higher prices, especially in metropolitan areas.
“Many employers may conclude that what was a relatively inexpensive perk for employees is too expensive,” the Roundtable says.
Reproduced from National Underwriter Life & Health/Financial Services Edition, January 27, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.