Group Life Insurers In A Bind
Hopes Pinned On TRIA
To End Reinsurance Scarcity
By Jim Connolly
Driven by tight availability and big ticket costs for reinsurance and the potential for huge losses that a major terrorist event would bring, group life insurers are urging Congress to pass legislation that would provide a financial safety backup if a major terrorist strike hits the United States.
At press time, the situation is very fluid, with several pieces of legislation introduced that would include group life insurance in an extension of the Terrorism Risk Insurance Act. Passage of a TRIA extension is, in and of itself, uncertain. And, the window of opportunity is getting smaller, with a summer recess and fall campaign obligations whittling away the time to get legislation passed.
Frank Keating, president of the American Council of Life Insurers, Washington, spoke with National Underwriter of the need to get a safety net in place.
The interview with Keating was conducted even as Tom Ridge, Secretary of the U.S. Department of Homeland Security, was issuing a statement warning of “credible reporting” that al-Qaida could carry out “a large-scale attack in an effort to disrupt the democratic process.”
Keating asserts that because group life insurance involves concentrations of risk, it is important that Congress include it in legislation. “We are not asking for corporate welfare but for help in the event of a calamitous loss.”
The definition of calamitous is still being discussed, according to Keating. However, he emphasizes that “it should be an enormous and not simply a regrettable calamity.”
However, the Consumer Federation of America, Washington, recently argued that any extension of TRIA should be postponed until the Treasury Department concludes a mandated study next year on how well the law is actually working. It argued that an unnecessary extension could force taxpayers to pay for terrorism losses that the insurance industry could otherwise afford.
Further, Robert Hunter, CFAs director of insurance, says that “in a bait and switch maneuver,” what was “sold” as a temporary fix is now advocated as a program that needs to be extended.
Representatives in the insurance industry see the situation differently. Interviews offered a thumbnail sketch of an industry in which: a difference in a penny per thousand of insurance can make the difference between winning a group life contract with an employer; reinsurers assume business from direct writers as a service to accommodate established business relationships; and, a typical reinsurance arrangement includes a $20 million deductible and $20 million of reinsurance.
Those interviewed say a major terrorist event could “financially shred” the current system.
Group life is important to the average American and reinsurance is vital to group life, says Edwin Harper, senior vice president, Assurant Inc., Washington, and a leader in a group life coalition that is arguing for the inclusion of group life in TRIA.
Without reinsurance, the economic model for group life does not work, he says, and since 9-11, reinsurance has been scarce and expensive.
It is a public policy issue, he argues, because group life is the only life insurance policy many workers own and it is affordable because it is part of a compensation package provided by employers.
LIMRA International, Hartford, Conn., says in its “2003 U.S. Group Life Insurance” report that on average, each group contract contained 204 certificates in 2003. Term coverage averaged $50,000 per certificate and permanent insurance, $114,000.
With the potential for terrorist attacks involving huge loss of life, group life insurers could be forced out of business, Harper says.
Relief afforded by state guaranty funds is limited, particularly if there is a major loss of life, he adds.
“As with any safety net, the program is not unlimited,” says Peter Gallanis, executive director of the National Organization of Life and Health Insurance Guaranty Associations, Herndon, Va.
There is a 2% annual ceiling of assessments for companies participating in the guaranty systems, he adds. The annual assessment capacity to the industrygiven the caps in individual states, the District of Columbia and Puerto Ricois in the $6 billion range, Gallanis says.
“We need an organized backup,” says Cecil Bykerk, executive vice president and chief actuary with Mutual of Omaha Insurance Company, Omaha, Neb. With it, he says, there will be a mechanism in place to ensure an orderly continuation of business if a catastrophic event occurs. But without such a mechanism, he adds, “what we are looking at is pandemonium.”
The lack of a backstop in the wake of 9-11 has made the current reinsurance market difficult enough, he says.
There is currently a little more availability of reinsurance than before, according to Bykerk. “However, the amounts that [reinsurers] are willing to sell is frankly quite small and the prices, extremely high.”
The price is beyond the level that the underlying product can support, Bykerk says, and “the amount we can buy is not enough to be more than cosmetic on an annual statement. It is not going to keep a company from going insolvent.”
Normal risks are being covered at a rate 10 times the rate for the underlying business companies are trying to cover, according to Bykerk, who adds there are exclusions for nuclear, chemical and biological weapons.
While $20 million in catastrophe reinsurance cover with a $20 million deductible might be adequate for a small event, it could prove to be inadequate given the large amount of group life business in force.
“It is really pouring profits down the drain,” he continues. Mutual of Omaha is self-insuring, Bykerk adds.
After 9-11, there was discussion of new capital coming into the market from Bermuda and other sources, he says, but to date, there has not been much evidence of new capital.
Currently, there is limited reinsurance capacity and that capacity will be more available to those direct writers who can better assess the risks in the business they hold, says Scott Machut, vice president-life, accident & specialty reinsurance, with ING Res Minneapolis office.
Concentration of risk is an important component to review when examining business held, he says. Evaluation of business, according to Machut, includes: an employee head count per location as well as the exposed volume or amount of insurance purchased. It goes beyond ZIP code and mailing addresses, he continues.
Direct writers are starting to manage risks better, he continues. “They still have a ways to go, but they have come a long, long way since 9-11.”
Machut says ING Re works with companies to see if direct writers are exceeding their risk tolerance. This is done by creating maps where risk is concentrated and seeing if a companys business falls within these areas, he adds.
One company, Machut notes, informed its sales staff that it would not pay commissions if large concentrations of the salespersons business was in one location.
Reproduced from National Underwriter Edition, July 16, 2004. Copyright 2004 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.