“Government Insurers Study Note,” CAS Study Note, May 2006 – W
If aggregate losses reaches $100B in a year, insurers are released from paying any losses beyond their deductibles.
Treasury Dept recoups part of the federal share of terrorism losses if the sum of the insurers’ retention is less than the aggregate retention amt (which increases each year). This would by accomplished by a surcharge on all P&C policies in force.
TRIA was to expire on 12/31/2005, but has been extended to 12/31/2007.
TRIA does not cover crop, mortgage guaranty, financial guaranty, med mal, flood, reinsurance, health and life. It does cover other commercial P&C.
Extension modifications: trigger raised to $50M in 2006 and $100M in 2007. Aggregate retention also increased. Certain LOB previously covered no longer covered.
TRIA met needs unmet by private insurance and serves a social purpose.
Alternatives to TRIA: private market could take back over; CAT bonds could supplement the private insurance market.
Other concerns: TRIA may create a disincentive for loss control; and demand for terrorism cvg is not as great as before.
P&C Ins Assoc argued that private market is still not equipped to handle terrorism. The market for CAT bonds is too small to cover the capacity. And terrorism insurance availability has dramatically improved.
TRIA is more of a govt indemnity program in that insurers don’t pay any premiums.
Other concerns: Amount of time to determine an event – causing cash flow problems; some events may not be considered terrorism by TRIA (such as Oklahoma bombing); doesn’t cover personal lines or chemical, nuclear, biological, radiation losses.
Many argue that TRIA is still necessary.
Nyce, – SK
1) P&C insurance plans – what this article is all about.
2&3) social insurance plans & financial security plans – includes SS, unemployment, Fed Deposit Ins Corp (FDIC), Pension Benefit Guaranty Corp (PBGC).
Major difference between govt ins plan and private market lies in the primary objective of each.
Private insurance = actuarial equity = premiums match loss exposures. Example: private auto insurance collects enough premiums to cover expected claim losses.
Public insurance = social equity = provide benefits to public in response to a far-reaching cause of loss. Example: residual markets provide service at reasonable cost.
Rationale for Government Involvement – in a perfect world, there would be no need for govt insurance, but private insurance markets don’t always function perfectly. The following are reasons for the govt to get involved.
Fill Unmet Needs – example = Terrorism Risk Ins Program (TRIP) started by TRIA.
Compel Insurance Purchase – example = WC.
Obtain Efficiency and Provide Convenience – example = NFIP, however, they use private insurers to help market.