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5 reasons for government’s participation in insurance:
- filling needs unmet by private: (unavailability or unaffordability) e.g., crop, flood
- compulsory purchase of insurance: auto insurance (normally not the answer), WC
- convenience: government can set up program quickly, e.g. Florida Hurricane Cat Fund
- greater efficiency: some services can be provided at a lower cost
- social purposes: rehab and vocational training of injured workers, Social Security
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Evaluation of a government insurance program
- is it necessary or does it achieve a social purpose?
- is it insurance or a social welfare program?
- is the program efficient, is it accepted by the public?
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Insurance vs welfare programs
- benefits:
- insurance - those who contributed and suffer a loss, regardless of need
- welfare - those who need it, regardless of contribution
- social welfare is usually financed by general tax resources, not premium
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Insurers response to 9/11
- attempted to exclude coverage for terrorism losses where possible
- substantially increased prices where coverage could not be excluded (e.g. WC, fire)
- reinsurers (largely unregulated) restricted coverage quickly (January renewals)
- primary insurers were not able to restrict coverage as rapidly due to regulatory constraints
- 45 states + Puerto Rico and DC had approved terrorism exclusion by 2/22/2002
- "large risk" rule of many states allowed insurers to restrict coverage without reg approval
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Impact of terrorism coverage availability
- numerous construction projects would be delayed or canceled, since owners / lessors would have difficulty meeting legal or contractual obligations, such as full insurance
- affect investing activity since many types of securities are backed by collateral assets that would no longer be insured
- after an act of terrorism, impact would be borne by commercial businesses and citizens
- federal govt mitigation would result in a substantial delay compared to private insurers
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Conditions for an event to qualify under TRIA
- insured property and casualty losses must exceed $100M
- event must be dangerous to human life, property or infrastructure
- damage must occur inside the U.S. or U.S. mission / flagged vessels / air carriers
- must have been committed by an individual as part of an effort to coerce the civilian population of the U.S. or influence the policy or conduct of the U.S. government
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Conditions for private insurers
- must offer coverage on the same terms and conditions as relates to other perils
- government reimburse each insurer subject to the conditions that insurer paid more than its deductible and insurer retains 15% of the losses exceeding the deductible
- if aggregate insured losses reaches $100B in a year, only deductible
- if industry < aggregate retention, surcharge on all inforce policies remitted to Treasury
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Arguments to end TRIA
- private market could supply the required coverage
- tends to create an indifference to loss control
- catastrophe bonds can be used to supplement the market
- demand is not as great as initially expected (<50% commercial)
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Arguments to continue TRIA
- private insurance market is not equipped to provide coverage
- cat bond market is too small to provide capacity required
- availability has improved substantially under TRIA
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Concerns about TRIA
- it has some characteristics of a government indemnity program (no premium for insurers)
- concern about amount of time required to certify event and distribute payments
- does not cover personal lines
- does not cover attacks involving nuclear, biological, radiological events
- lack of public acceptance suggested by low penetration
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