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Terrorist Attack Could Wreck Group Life Industry: ACLI

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A terrorist attack with huge loss of life would have a catastrophic financial impact on group life insurers because no reinsurance for this loss is available.

That is what the American Council of Life Insurers is telling the President’s Working Group on Financial Markets, a part of the Treasury Department.

The ACLI submitted its analysis of the impact of terroristic violence on the industry in answer to questions the working group raised about the long-term availability and affordability of group life in the event of such a tragedy.

As part of a mandate under the legislation extending the Terrorism Risk Insurance Act, the President’s Working Group must report back to Congress by September on the need for further government involvement in terrorism risk insurance. The ACLI’s comments were in a letter to the group from Wayne A. Mehlman, ACLI counsel for insurance regulation.

Terrorism risk “has had no measurable impact on the availability and affordability of group life insurance,” Mehlman wrote.

That’s because group life coverage is based “on the sum of probabilities” of individual deaths rather than the probability of many deaths resulting from a single event, his letter said.

Mehlman added that the group life market’s continued inability to price for the risk of terrorism “also explains the current availability and affordability of group life insurance coverage.”

As terrorism is a recent phenomenon in the United States, actuaries lack reliable historical data on the incidence rate of terrorism to predict the frequency and severity of future attacks.

“Although news reports suggest future attacks are likely, numerous ‘unknowns’ (e.g., location and magnitude) contribute to insurers’ continued inability to price for this risk,” the letter said. “Moreover, the very nature of terrorism–a non-natural event–makes it a risk for which actuaries have no basis to price.”

However, in the long-term, “the current availability of group life insurance could diminish, or even disappear, if catastrophic reinsurance remains practically unobtainable and insurers no longer view the risk-return relationship as financially sound,” the letter said.

If there were a catastrophic terrorist event, it is likely many existing group insurers exit the market once their policies expire, the letter said. Furthermore, “it is highly unlikely that new insurers will take their place, thus further restricting the availability and increasing the cost of group life insurance,” Mehlman added.

Without reinsurance, there would be a huge impact on the marketplace, he warned.

Because of insurer insolvencies and a dearth of capacity for new coverage, financial markets would suffer, he explained.

“Widespread insurer insolvencies would not only adversely impact policyholders (e.g., in the form of unpaid claims) but also harm our nation’s financial and job markets (e.g., the ripple effects of bonds sold, jobs lost) which, in turn, would also hurt consumers.”

Widespread insolvencies would further strain and even break the state guaranty fund system, the letter said.

In 2004, group life carriers provided families with $7.6 trillion of protection, the letter added.

“Without adequate and affordable catastrophic reinsurance, life insurers will have no choice but to continue to reevaluate their business and concentration of risk and to reduce their exposure by limiting the amount of coverage they are willing to offer employees,” the letter said.


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