by Lucy Komisar
American Reporter Correspondent
New York, N.Y.
November 19, 2002
UNDER NEW BILL, TAXPAYERS TO UNDERWRITE INSURANCE LOSSES
NEW YORK -- Maurice "Hank" Greenberg, chairman and CEO of American International Group (AIG), the world's second largest financial conglomerate, had a successful sojourn on Capitol Hill recently. He persuaded the leaders of Congress that U.S. taxpayers ought to give insurance companies a multi-billion handout in the event of losses ascribed to terrorism.
The legislation privatizes profit and socializes risk. It could cost U.S. taxpayers billions. Conservative Senator Phil Gramm (R-Tx) denounced it as "a windfall." The House passed the House-Senate conference agreement by voice vote Thursday, and that will go to the Senate after it votes on the Homeland Security bill, expected early this week.
One of the big winners will be Greenberg's AIG, the largest U.S. underwriter of commercial and industrial insurance. AIG does not seem a likely candidate for corporate welfare. It has over $500 billion in assets, a market value of $190 billion, $40 billion in revenue and $5.8 billion in annual profits. It has operations in 130 countries and nearly 77,000 employees. It ranks fourth on Forbes' list of the America's biggest companies, after Citigroup, General Electric and ExxonMobil. Does it need a taxpayer subsidy?
The federal program - giving insurance companies up to $100 billion! - would be triggered once the insurance industry sustains only $10 billion (drastically cut from an original $100-million-to-$1-billion formula) in terror losses. Terrorism will be defined by the administration. Will any arson on a $5 million building be labeled "terrorism" by a "business-friendly" administration to make the taxpayer pick up damages in lieu of insurance companies?
An initial bill had a $10-billion deductible for the whole industry, then a 90-percent payout up to $100 billion, but AIG got that eliminated. Now insurers would have to pay deductibles equal to a percentage of premiums earned the previous year -for the first year 7 percent, then 10 percent, then 15 percent. After that, taxpayers would pick up 90 percent of losses.
Beneficiaries even include "alien insurers" - the companies that set up phony Bermuda or Barbados addresses to escape U.S. taxes. They don't pay in, but taxpayers will pay out!
There's no provision for premiums to be rebated based on what insurance companies receive from the federal government. The feds pay, but insurance companies keep the premiums. Then policyholders - not the insurance companies! -- have to pay back federal handouts up to $10 billion (of industry losses for the first year) to $15 billion (by the third year), via a surcharge of up to 3 percent of policy premiums.
The companies win twice; consumers lose twice. There is no requirement to pay back the total windfall, which could reach $100 billion. (An initial bill had assessments on insurance companies up to $20 billion and surcharges on premiums paid by policyholders for losses above $20 billion.)
Sen. Bill Nelson (D-Fla.), a past state insurance commissioner, opposed the bill because, as his spokesperson explained, "The people who paid the premiums don't get anything back, taxpayers will pay the losses, insurance companies will get the cash."
The insurance industry is "wealthy and overcapitalized" and has no need of this federal aid, says Robert Hunter of the Consumer Federation of America, which opposes the bill,
After 9/11, there was fear that companies could not get terrorism insurance, but that didn't happen. The industry lost $20 to $26 billion on 9/11, but then increased profits by 66.4 percent in the first half of the year. It will not surprise homeowners who saw their insurance go up that price-gouging premium spikes of 20 to 30 percent are bringing in more than was lost in the attacks. In July, AIG reported that its second-quarter net income had increased 38.5 percent.
In fact, Greenberg reflected insurance companies' strengths in February when he asked Washington not to offer airlines war and terrorism insurance since, "We, as taxpayers, don't want to compete with [the]….government for business that the commercial sector can underwrite." Insurance companies are writing terrorism insurance and charging top dollar for it. And stand-alone terrorism coverage is priced on the assumption that the insurer will cover 100 percent of claims.
Who are the supporters? President Bush and the Republican and Democratic leaderships. A Senate staffer said that insurance companies passed out a lot of money in the recent election campaign.
The bill, H.R. 3210, known as the Terrorism Risk Protection Act, passed the House in November 2001 by a vote of 227-193. There were Republican 207 yeas and 19 Democrat nays. S. 2600 cleared the Senate in July 84-14. In the Senate the lead sponsor was Democratic Sen. Chris Dodd, representing the insurance capital, Connecticut.
Co-sponsors included Senate Banking Committee Chairman Paul Sarbanes (D-Md.) and Sen. Charles Schumer (D-N.Y.), who is known as a friend of the financial services industry. Their parliamentary maneuvers bypassed committee review and sent the bill directly to the Senate floor.
The insurance companies are pleased. Taxpayers, kept in the dark by media disinterest, should not be. This bill is yet another example of a Congress in thrall to corporate campaign contributions executing an end-run around the interests of ordinary Americans.
[Editor's Note: The law described in this article was passed by Congress on Tuesday, Nov. 19, 2002.]
Lucy Komisar is a New York journalist who writes on corporate corruption.