Actuaries to White House: Federal insurance backstop needed

May 8, 2006

The American Academy of Actuaries, in response to questions posed by the President’s Working Group on Financial Markets, has submitted its terrorism risk insurance analysis, which concludes that a national framework for terrorism risk is necessary if terrorism coverage is to be widely and readily available.

“A large chemical, nuclear, biological or radiological (CNBR) terrorist attack on New York City could cause insured losses of $778 billion,” said Michael McCarter, chairperson of the Terrorism Risk Insurance Act Subgroup. “Without a national framework for managing terrorism risk, insurers would be exposed to losses far greater than they could sustain — significantly damaging their ability to provide the ongoing insurance coverage that is essential to the stability of the entire economy.”

The actuaries were not able to identify any insurance, reinsurance or capital market solution that could finance such potential insured losses from a large CNBR event.

With their solvency threatened, insurers would be forced to limit their exposure to losses from a terrorist attack.

For workers’ compensation and group life insurance, an insurer could only reduce its terrorism exposure by limiting the availability of the underlying coverages, the group said.

The president’s working group is preparing a report about the long-term availability and affordability of terrorism insurance. The report is due to Congress by Sept. 30, 2006.

To view the analysis in its entirety, visit www.actuary.org.

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