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Detail Outline for Exam 7 – 2007 Part C - page 11 / 28

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“Government Insurers Study Note,” CAS Study Note, May 2006 – W

However, they have not been successful in increasing the level of EQ to homeowners.  Currently, less than 15% of CA HO’s purchase EQ.  They have cut rates and increased consumer education to entice more people to get insurance.

Pension Benefit Guaranty Corporation – created in 1974 as a result of Employee Retirement Income Security Act (ERISA).  It’s meant to insure pension plans for if employer terminates the plan.

Qualified pension plan = those that meet ERISA conditions for tax-deferred treatment.  These are defined benefit plans (where employee receives a fixed amt or sequence of pmts) or defined contribution plans (where employee receives benefits from a fund he contributed to – and the employer may also contribute).

Only defined benefit plans are guaranteed by the PBGC.

PBGC takes over a plan if employer shows lack of resources to fund it.

PBGC may also terminate a pension plan in order to protect the plan participants or the interests of the PBGC.

Thousands of employees are now covered, meeting the goals of PBGC.

Suggestion: employers should be encouraged to switch to defined contribution plans.  If so, the PBGC would then be unneeded.

OTOH, the AAA suggest defined benefit pension plans should be encouraged.  These offer reduced investment risk (to the employee); elimination of risk of outliving benefits or of spending benefits too quickly.

AAA further points out that defined contribution plans create incentives for employees to retire based on stock market performance.  If up, employees retire early.  If down, employees delay their retirement.

PBGC protection is social insurance.  Benefits are paid from premiums charged to plan providers.  (Though the premiums may not be adequate.)

Current system is struggling, but is considered to be essential.  Accounting rules are excessively complex – providing perverse incentives.  Also, the PBGC has a large deficit.

Terrorism Insurance Act of 2002 and Extension – arose out of WTC attacks of 2001.

Insurers started trying to exclude cvg and/or dramatically increase premiums.  Reinsurers acted quickly as renewals were mainly up in January.

By Feb 22, 2002, 45 states & DC approved a broad ISO terrorism exclusion.

W/o terrorism cvg, construction projects would be delayed/canceled.  Owners of airports and other large properties would have trouble meeting legal obligations (due to lack of insurance).  Many types of securities backed by certain assets that would no longer be insured.

If a terrorism event occurred, the burden would be on commercial and citizens.  In most cases, the govt would mitigate the loss, but they would need the claims handling infrastructure in order to respond to individual losses.

This led to TRIA – another program where a federal reinsurance program works in partnership w/ private insurance companies.

Insurers are required to offer terrorism cvg.

The govt reimburses the insurer if:

1. Insurer paid $5M in loss;

2. Insurer paid more than its deductible (a %-age of EP);

3. Insurer retains 10% of losses exceeding the deductible.

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