Insuring a Fair Deal

An Interview with Robert Hunter

Robert Hunter is the Consumer Federation of Americaís Director of Insurance, former Federal Insurance Administrator, and a former Texas Insurance Commissioner.

Multinational Monitor: Why does the U.S. insurance industry need any government assistance right now?

Robert Hunter: It’s arguable that they don’t, but it’s too high of a risk to assume they don’t. The reinsurers are pulling out of the market and private insurers that write the primary coverage will have difficulty, particularly with very large risks, without reinsurance. So I don’t think it’s worth the risk not to have some sort of plan to make sure that the major risks underlying the American economy have some kind of protection as of January 1.

MM: These are risks related to terrorism?

Hunter: There are risks to major potential targets such as Disney World, Shea Stadium or the Empire State Building. Places like that require a lot of insurance.

Individual insurance companies can’t insure them alone. They have to form reinsurance pools. The reinsurers have retrenched. Swiss Re took a huge hit from the World Trade Center –– somewhere between $3.5 billion and $7 billion, depending on how the court rules. Individual companies can’t stand that sort of risk without some kind of backup.

MM: So the insurers are stepping back and the government needs to step in?

Hunter: It’s really the secondary market — the reinsurance market — that’s backing out because it took such a big hit. The primary insurers — companies like State Farm and Allstate — have plenty of money, but they tend not to write these big commercial risks. It tends to be other companies who rely on this network of reinsurers that have backed out — mostly reinsurers from other countries.

MM: What kind of proposals is the industry putting forward?

Hunter: The industry put forward a proposal modeled after the UK pool reinsurance plan, which would establish some kind of non-regulated pool of insurers which wouldn’t have any antitrust law and wouldn’t be regulated — basically, it would permit the industry to do anything it wanted. They would be licensed under a federal charter, but under state of Illinois law, and they wanted free back-up. If they had terrorism losses, they wanted taxpayer money to back them up.

It was such a case of overreach that whoever wrote it probably has a dislocated shoulder. They tried to throw their entire wish list, including tort reform, into the bill. Fortunately, it seems like Congress is paying no attention. The administration bill is pretty bad, but at least it’s not as bad as the industry bill.

MM: What are the things that are under consideration?

Hunter: The industry approach is dead-on-arrival in both houses. The Bush administration, working with the Banking Committee, has come up with what I would call a handout. It goes beyond a bailout, and would give taxpayer dollars to back up the industry very extensively.

Fortunately, the House committees have marked up a bill which is much more sensible. It would give significant backup to the industry, but would require a payback of the monies which would accrue as loans against the insurers for the first level and above that against the entire industry. In other words, it would automatically spread the costs through some kind of loans that would be paid back by the entire industry. Ultimately, the industry would bill their consumers, but it would be limited to commercial consumers, so it would be corporate entities that would pay it back instead of individual taxpayers.

The administration plan, by contrast, would have the individual taxpayer pay back.

MM: Would those involve 100 percent payback of the government outlay?

Hunter: The bill calls for 100 percent payback to the government through a combination of mechanisms. The first layer would be loans directly paid back by the insurer out of surplus. Above that — if there were a really big terrorist event or series of events — then the loans would be spread across the entire commercial insurance market.

MM: Are there other central principles that consumers and taxpayers should look for in a sound assistance bill?

Hunter: It should be actuarially sound — taxpayers should be paid back, over time, for the costs of the reinsurance effort. Rates charged to consumers, including businesses, should be actuarially sound and the war and terrorism components of these rates should be correlated to the federal reinsurance charges. All insurers should be required to reinsure against the perils of war and terrorism through the federal government at the outset of the program. And people should still be able to sue or collect without any bad faith by insurance companies.