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Consumer group calls for terrorism insurance safeguards

The Consumer Federation of American (CFA) has urged state and federal officials to take more aggressive steps to protect and inform insurance consumers under the recently enacted Terrorism Risk Insurance Act of 2002.  CFA has also objected to the U.S. Treasury Department’s interim decision to allow insurers to limit coverage for events related to nuclear, biological or chemical events if authorized to do so under state law. 

The National Association of Insurance Commissioners (NAIC), a group representing state insurance commissioners, claims the Terrorism Risk Insurance Act and the Treasury Department’s guidelines will not result in unfair limitations on coverage for damage caused by nuclear, biological or chemical attacks.

“Insurers have had limited coverage for nuclear, biological and chemical events in commercial lines insurance products for quite some time,” said NAIC President and Arkansas Insurance Commissioner Mike Pickens. “What is excluded from coverage in these coverage limitations is the damage from nuclear, chemical or biological contamination of property, not the ensuing fire damage that would result from a nuclear or chemical blast. Radiation from failed nuclear reactors is also excluded, because coverage is available from another source. Thus the Treasury Department guidance does not allow for blanket exclusions as the CFA has implied.”

The CFA has also encouraged state insurance regulators to take an active and aggressive role in monitoring and preventing price gouging.

“State insurance regulators, through the NAIC, are taking steps to actively monitor insurance markets and stand ready to implement needed statutory remedies when abuses are discovered,” Pickens said. “State regulators have appointed a Market Conditions Working Group to monitor market conditions related to distressed insurance markets and terrorism, and they have been actively collecting information on a quarterly basis since 9/11.”

State regulators are also monitoring premium growth figures reported by insurers. This monitoring process will assist the Department of the Treasury in conducting its study of the effectiveness of the Terrorism Risk Insurance Act. 

“Not all state rate-filing laws are the same. States differ in the type of statutory provisions that they have available to them to constrain insurer rate changes,” Pickens continued. “Virtually all states have laws that require that rates not be excessive, inadequate or unfairly discriminatory. If a policyholder believes that the rates charged by insurers are excessive, they should contact their state insurance regulatory official.”

Pickens says all states have consumer assistance personnel to help policyholders with their insurance problems. To find out how to contact your state’s insurance department, go to the NAIC web site at www.naic.org.

CFA claims more protections are needed

Despite assurances from NAIC, the CFA claims the regulations in place on the federal and state levels don’t provide enough protection for insurance customers. 

CFA claims both the Treasury Department and NAIC have issued regulations, which require taxpayers to pick up 80 to 90 percent of the cost of terror losses for the next three years.

"Insurance companies won't even have to provide coverage for all types of terror incidents, such as chemical and biological attacks," says J. Robert Hunter, CFA’s Director of Insurance. "Insurers also won't have to spell out for policyholders whether the free reinsurance they are receiving will lower consumers' rates, leaving the law open to abuse by price gougers," Hunter adds.

In letters to the Treasury Department and NAIC on December 27th, 2002, CFA urged federal and state regulators to take the following steps:

1. Do not allow insurers to refuse to cover nuclear, chemical and biological attacks. Despite the fact the new law has no exemptions for certain types of terrorism coverage, the Treasury Department's Interim Guidance on implementing the Act states insurers do not have to cover nuclear, biological or chemical "events" if states permit these exclusions. The only explicit exemption for particular insurance risks in the Act is for declared acts of war. Moreover, supporters of the law claimed the requirement of coverage for biological and chemical attacks was one of the major reasons why the Act was necessary. CFA has urged the Treasury Department to reverse its decision and the NAIC to disapprove any requested exclusions for nuclear, chemical or biological attacks.

2. Require insurers to tell policyholders exactly how the new law will affect their rates. The CFA claims the NAIC's model disclosure requirements are vague and insufficient. CFA has urged NAIC to require insurers to inform policyholders with current terror coverage they are likely due a refund, and to tell policyholders without terror coverage how federal reinsurance is reflected in the rates being quoted.

3. Ask tough questions about the possible federal back up for group life insurance. The Terrorism Risk Insurance Act requires the Treasury Department to determine whether group life insurers should receive federal reinsurance under the law. CFA claims the case for expanding the Act to cover group life is very weak. Even the NAIC, which is generally very sympathetic to the needs of the insurance industry, has refused to allow group life insurers to exclude terror coverage. CFA has urged the Treasury Department to demand insurers provide extensive documentation of the need to provide taxpayer support for group life insurance companies.

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