Thursday, January 13, 2005

Warning Issued by CBO: Worker Compensation Will Increase Substantially...

OK, hot off the government presses. Here is the Federal Congressional Budget Office (CBO) assessment on Terrorism Risk Insurance Act of 2001 (TRIA). You can read the entire report here.

TRIA was designed as a temporary, backstop measure to keep the economy moving by allowing the government to subsidize and support the insurance and re-insurance industry against a major terrorist event. This report, developed by the CBO was to reassess TRIA in light of today's current events and the fact that TRIA is scheduled to expire at the end of 2005.

The highlights: (emphasis, bold and highlights, mine)

  • "...there is a growing perception that the risk of
    terrorism is likely to remain high. That development suggests
    that property owners and businesses need to take
    measures to reduce their exposure to that risk. They
    would have a stronger incentive to take such measures if
    the insurance subsidies conveyed through TRIA were reduced
    or eliminated."
  • "...the underwriting capacity
    of the insurance industry has recovered greatly. That
    change implies that private insurers can play a bigger role
    in providing terrorism coverage."
  • "If TRIA expired as planned, premiums for terrorism insurance
    would be likely to rise, perhaps substantially
    . Not
    only would the end of federal subsidies drive up rates in
    the private sector, but the uncertainty associated with the
    risk of terrorism could lead insurers to charge higher premiums
    than they would if they had more-precise estimates
    of the probability, frequency, and size of possible
    losses."
  • "The study predicted that economic growth would be
    slowed because higher premiums for property insurance
    (and a resulting decrease in property values) would raise
    operating costs for businesses and because higher premiums
    for workers’ compensation would increase labor
    costs
    ."
  • "Reinsurers would also probably continue to exclude losses
    related to nuclear, biological, and chemical attacks from
    their coverage. That exclusion would be important
    mainly for the workers’ compensation market, since primary
    insurers for that type of policy must cover loses
    from all causes.
    Potentially, insurers would be unable to
    diversify that catastrophic risk, at least in the near term,
    so rates for workers’ compensation policies could rise substantially."

The report goes into detail about assumptions, macroeconomic models, etc.

Here's the upshot: IF TRIA expires, you will pay more for workers compensation insurance. I am not here to make assessments of the policy or the CBO's work. I want you to know what is happening so you can prepare. Consider this as you would a tsunami alert.

The big IF here is will Congress allow TRIA to expire. The battle has been joined by the insurance industry for sure.

The Big "I", the Independent Insurance Agents Association, has this to say:

"Renewal of TRIA is crucial to the ability of our industry to cover catastrophic losses related to terrorism and also to preserving confidence in the marketplace," Symington says. "Existing TRIA legislation expires at the end of this year, and it is crucial that we get this act renewed as quickly as possible."

From the National Underwriter:

"Julie Rochman, an official at the American Insurance Association, Washington, says the fact that the CBO analysts minimize the cost of letting the TRIA program die is "disappointing.""

The Professional Insurance Agents of America (PIA):

"Agents and brokers should encourage clients to contact their legislators in support of extension of the Terrorism Risk Insurance Act (TRIA). That was one suggestion offered by PIA National Senior Vice President Patricia A. Borowski."

Here's my press release on the same subject:

Warning Issued by the Federal Congressional Budget Office about Worker Compensation

This one bears watching. The Department of Treasury is scheduled to release its assessment in June.


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