November 22, 2002

Congress Poised to Rip Off Consumers Over Terror Insurance

By Lucy Komisar

Congress just handed insurance companies a multi-billion dollar handout — and most U.S. taxpayers don’t even know it.

The Terrorism Risk Insurance Act privatizes profit and socializes risk. Though he voted for the Homeland Security Act, even conservative Sen. Phil Gramm (R-Texas) voted against the insurance measure, dubbing it “a windfall.”

One of the big winners will be American International Group (AIG), the world’s second-largest financial conglomerate and largest U.S. underwriter of commercial and industrial insurance. CEO Maurice “Hank” Greenberg was instrumental in persuading leaders of both parties to give insurance companies a handout in the event of losses ascribed to terrorism.

With $40 billion in revenue and $5.8 billion in annual profits, AIG is not a likely candidate for corporate welfare. It ranks fourth on Forbes’ list of America’s biggest companies, after Citigroup, General Electric and ExxonMobil.

The federal program, which will pay out insurance company claims for losses up to $100 billion, will be triggered once the insurance industry sustains only $5 million in terror losses. That’s a far cry from the original House formula, in which the government bailout would have begun after industry-wide losses of cumulative claims exceeding $1 billion, or a loss to one company exceeding $100 million. The Senate bill had a cumulative $10 billion industry-wide trigger. But the insurance industry got it eliminated.

Now, if there is a $5 million industry-wide loss, individual insurers are eligible for U.S. funds after paying out losses equal to a percentage of premiums the company earned the previous year — beginning at 7 percent and rising to 15 percent by the third year. Taxpayers pick up 90 percent of the rest.

“Terrorism” will be defined by the Secretary of the Treasury, the Secretary of State and the Attorney General. Could arson that destroys a $5-million building be called “terrorism” by insurance companies that would rather see taxpayers pick up the losses? Since terrorists don’t leave calling cards, how would one know? This business-friendly administration, making political capital out of fear of terrorism, may not hesitate to grant that label on behalf of its corporate supporters.

Beneficiaries of the new legislation even include “alien insurers,” companies that set up phony Bermuda or Barbados addresses to escape U.S. taxes. They don’t pay in, but U.S. taxpayers will pay out.

There’s nothing in the new law that requires insurance companies to rebate premiums, even though, with the government handout, insurers are not paying all the costs of claims. In fact, policyholders will pay a surcharge of up to 3 percent of their premiums to refund the federal handouts.

“The people who paid the premiums don’t get anything back, taxpayers will pay the losses, insurance companies will get the cash,” explained Gretchen Hitchner, spokeswoman for Sen. Bill Nelson (D-Fla.), a past state insurance commissioner who criticized the bill. Nelson had tried unsuccessfully to pass savings on to consumers by putting a cap on premiums, but in the end voted in favor of the legislation.

There is no requirement — only a federal option — to ask for payback of the total windfall, which could reach $90 billion a year.

The bill’s supporters argued that companies can’t get terrorism insurance, which has caused construction and real estate transactions to drop. Both claims are false.

“The only sector with persistent but limited terror insurance problems is high-end real estate, not new construction,” says Robert Hunter of the Consumer Federation of America, which opposed the bill. Even after 9/11, Hunter says, terrorism insurance is widely available. “The vast majority of businesses in America have terror coverage.”

The insurance industry, Hunter adds, is “wealthy and overcapitalized” and has no need of this federal aid. The industry lost $20 to $26 billion on 9/11, but then increased profits by more than 65 percent in the first half of 2002.

In July, AIG reported that its second-quarter net income increased almost 40 percent.

President Bush and the Republican and Democratic leaderships supported the bill.

The original House version of the bill passed in November 2001 with overwhelming Republican support. The lead sponsor of the original Senate version was Democrat Chris Dodd, who represents the insurance capital, Connecticut. Co-sponsors included Senate Banking Committee Chairman Paul Sarbanes (D-Md.) and Sen. Charles Schumer (D-N.Y.), known as a friend of the financial services industry.

On Nov. 19, the Senate passed the measure 86 to 11 after voting on the Homeland Security Act.

Senators didn’t even subject the bill to customary committee and public scrutiny, but executed a parliamentary maneuver to bypass committee review and move the bill directly to the floor.

The insurance companies are pleased. Taxpayers, kept in the dark by media disinterest, should not be.

Lucy Komisar ( is a New York journalist who writes on corporate corruption.

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