Congressional hearing held on terrorism and insurance

Agents, risk managers and insurers press Congress for long-term TRIA solution

Two U.S. House subcommittees–the Committee on Financial Services, Subcommittee on Oversights and Investigation, and the Homeland Security Subcommittee on Intelligence, Information Sharing, and Terrorism Risk Assessment–held a hearing late last month to examine the ongoing issue of insuring the U.S. economy against terrorist attacks.

The hearing marked the first-ever joint inquiry into the issue by the two congressional subcommittees. The panel was convened by Homeland Security Committee Chairman Peter King, R-N.Y., Oversight and Investigations Subcommittee Chair Sue Kelly, R-N.Y., and Intelligence, Information Sharing, and Terrorism Risk Assessment Subcommittee Chair Rob Simmons, R-Conn. Its purpose was to re-examine the issue of terrorism risk insurance, focusing in particular on challenges faced by the insurance industry with regard to its ability to assess such exposures.

The hearing, “Terrorism Threats and the Insurance Market,” took testimony from several industry groups, including agents, brokers, risk managers and insurers.

The Independent Insurance Agents and Brokers of America gave testimony in support of a long-term solution for terrorism insurance after the expiration of the Terrorism Risk Insurance Extension Act (TRIEA) on Dec. 31, 2007.

The IIABA expressed concern that consumers will face sunsets and exclusion clauses in policies as TRIEA nears expiration without a long-term solution that addresses the issue. The IIABA highlighted findings that there is only a limited amount of private-sector terrorism reinsurance available and that the unique and unpredictable nature of terrorist attacks makes it difficult for insurers to calculate risks.

“The issue of terrorism risk insurance has too many variables to assess with the accuracy needed to provide effective private coverage,” said Charles E. Symington Jr., IIABA senior vice president for government affairs and federal relations. “It remains virtually impossible to determine when or where an attack may occur, or how serious it will be in terms of its effects, and these facts continue to make it extremely difficult for the insurance marketplace to provide adequate coverage for such an event.”

Terry Fleming of the Risk and Insurance Management Society Inc. delivered testimony on behalf of RIMS and said that the potential inability for risk managers to purchase terrorism insurance in the event that the TRIEA is allowed to sunset at the end of next year is particularly critical.

“Without coverage, many companies will be vulnerable to bankruptcy and extreme financial losses, which ultimately could adversely impact the nation’s economy,” according to Fleming. RIMS considers the availability of adequate insurance for acts of terrorism not just an insurance problem, but a national security and economic issue.

Terrorism is an uninsurable risk
Insurers also believe a long-term solution to terrorism risk insurance is needed, maintaining that catastrophic terrorism is uninsurable.

“The threat of a terrorist attack on U.S. soil remains very real, and, unfortunately, so do the many difficulties insurance companies face in trying to manage this volatile risk without some form of government involvement,” said Drew Cantor, American Insurance Association director of federal affairs. “The potential magnitude of loss from a terrorist strike greatly exceeds the available capital in the private sector insurance market.”

Cantor said that catastrophic terrorism is uninsurable by the private sector alone for other reasons, including the inability to model attack frequency and the interdependent nature of the risk. “These problems are exacerbated for the private market with regard to the possible use of nuclear, biological, chemical and radiological weapons,” Cantor said. “It is vital the federal government remain a partner in insuring this risk.”

“The further away we get from 9/11, the easier it becomes to forget about the enormous risk to the economy that terrorism presents,” said Ben McKay, senior vice president, federal government affairs for the Property Casualty Insurers Association of America.

McKay also said that terrorism is an uninsurable risk because of the industry’s inability to accurately predict the frequency or severity of future attacks, the broad range of possible targets, and the potential that damages from some attacks could exceed the industry’s capital base.

PCI in particular supports an approach that would establish a “middle layer” of reinsurance coverage to fill the gap between the losses for which the industry is responsible and those losses which would be paid by the federal government. Such a program would enhance the development of a viable private terrorism insurance market. However, PCI claims that a federal backstop would still be needed to stimulate such a market and to ensure that the economy was protected from the impact of a cataclysmic attack.

“We’ve got one chance to get this right before TRIA expires in December 2007,” McKay said. “We are working with a broad-based coalition of businesses to secure passage of a long-term solution that will eliminate the need to ask Congress for an extension of TRIA every two years. Continued extensions are not in anyone’s best interest, least of all the businesses that need such coverage in place.”

Post 9/11 for U.S. businesses
After Sept. 11, 2001, and before the passage of TRIA, many risk managers and their companies found it difficult to purchase property insurance, including coverage for terrorism on buildings and construction projects, reported RIMS’ Fleming, who says it is critical that a program be developed to provide continued coverage for acts of terrorism, including nuclear, biological, chemical, and radiological acts. NBCR attacks can vary widely in their effects, says the IIABA, that there is an inability to predict with any certainty or probability their severity.

One influence that might sway Congress to take action is the President’s Working Group on Financial Markets (PWG) study on long-term availability and affordability of insurance for terrorism, which is due to Congress by Sept. 30.

“The PWG study is an important piece of information as the Administration, Congress, policyholders and insurers work to create a workable long-term solution for protecting the U.S. economy against the threat of terrorism,” AIA’s Cantor stated. “We also hope that policymakers will look beyond that study–as they are doing with this hearing–to gather other vital information as we all look at how best to maintain the vital economic security net currently provided by the federal terrorism risk insurance program.”

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