Obama plans to cut terrorism back-up could kill cover

Risk Management Solutions’ boss Peter Ulrich has warned that the Obama plan to reduce the federal subsidy to terrorism-risk insurers could trigger volatility in the insurance market, Bloomberg reports.

President Barack Obama’s 2010 budget calls for a cutback in the subsidy under the Terrorism Risk Insurance Act. The law, enacted after the Sept. 11, 2001, attacks, repays insurers if extremists strike again.

Reducing the subsidy will encourage the private sector to “better mitigate terrorism risk” by “developing alternative reinsurance options and building safer buildings,” the government says.

Aon fears the worst

Without the government subsidy, more than 80% of current providers will no longer offer terrorism-risk insurance, said Aaron Davis, managing director with Aon National Property Brokerage.

“The insurance industry is highly distressed,” said Davis. The call for scaling back the act will have “very negative consequences.”

How it works

The federal government covers 85% of an insurer’s losses after claims exceed $100m. The company pays deductibles equal to 20% of its annual commercial premiums. The program is capped at $100bn in total losses. Congress and the Treasury Department may grant reimbursements beyond the cap.