Terrorism insurance market hits federal radar

Two new federal reports have found that the long-term development of the private terrorism insurance market remains at best uncertain due to the unpredictable nature of terrorist attacks. Both reports acknowledged that a totally private market solution to insuring against certain terrorist attacks is unlikely in the near future.

The U.S. Government Accountability Office report, prepared for Congress on Sept. 26, covers the risk of nuclear, biological, chemical or radiological (NBCR) attacks only, and does not address insurance for terrorist attacks by more conventional weapons. The report received backlash from property/casualty insurers claiming that terrorism is an uninsurable risk, whatever the choice of weapon.

“The real issue is terrorism itself and its uninsurability, not the specific weapon a terrorist may decide to use,” said Ben McKay, PCI senior vice president, federal affairs for the Property Casualty Insurers Association of America.

The President’s Working Group (PWG) on Financial Markets Terrorism Insurance report, released by the Treasury Department on Oct. 2, says that while the quantity of terrorism risk reinsurance capacity has increased since the period following Sept. 11, the presence of subsidized federal reinsurance through the Terrorism Risk Insurance Act “appears to negatively affect the emergence of private reinsurance capacity because it dilutes demand for private sector reinsurance.”

Future of terrorism insurance

Both reports are skeptical about the future of a terrorism insurance market in its entirety.

The PWG report concludes that the “high level of uncertainty currently associated with predicting the frequency of terrorist attacks, along with what appears to be a general unwillingness of some insurance policyholders to purchase insurance coverage, makes any prediction of the potential degree of long-term development of the terrorism risk insurance market somewhat difficult.”

Insurers claim the federal backstop provided under TRIA is the “single reason” that any private insurance market exists today.

“Over time, the private sector can assume a greater portion of the responsibility, but only with a public-private partnership is there any hope for terrorist insurance to be available and affordable,” McKay said.

Insurers, agents and business groups called on Congress to create a permanent solution to safeguard the economy against future terrorist attacks at a Congressional hearing focusing on how best to protect Americans from catastrophic terrorism risk when the current TRIA extension expires at the end of 2007.

At the hearing on Sept. 27, “Protecting Americans from Catastrophic Terrorism Risk,” industry groups urged Congress to replace TRIA with a long-term, market-based solution that does not arbitrarily pick winners and losers based on the type of attack, as an NBCR-only approach would do.

TRIA of 2002, as well as the extension passed in 2005, will cover losses from a certified act of terrorism, irrespective of the weapon used, if those types of losses are included in the coverage. The GAO was asked to study the extent to which these risks can be and are being insured by private insurers across various lines of insurance.

“While we’re pleased that it (GAO report) acknowledges the uninsurability of nuclear, biological, chemical and radiological (NBCR) attacks, we think a federal program should be accessible to insurers and consumers of all sizes and should not draw distinctions between some types of perils and not others,” McKay added.

The GAO report explains why NBCR losses are uninsurable. “Insuring NBCR risks is distinctly different from insuring other risks because of the potential for catastrophic losses, a lack of understanding or knowledge about the long-term consequences, and a lack of historical experience with NBCR attacks in the United States. Measuring and predicting NBCR risks present distinct challenges to insurers because the characteristics of the risks largely diverge from commonly accepted principles used in determining insurability,” the GAO report says.

The PWG report agrees with the GAO that coverage for CNBR is unlikely to develop. “Given the general reluctance of insurance companies to provide coverage for these types of risks, there may be little potential for future market development,” the report says.

Long-term solution

The insurance industry continues to be united in its stance for a long-term federal backstop for terrorism risk insurance.

The Independent Insurance Agents and Brokers of America testified at the Congressional hearing in September, saying a continued federal role is needed to ensure the availability of terrorism risk insurance, and it is essential for the federal government to look ahead now, before backstop legislation expires.

“It is crucial that all businesses have access to affordable insurance to protect them from this risk,” said Sharon Emek, chair of the board of the Independent Insurance Agents and Brokers of New York. “The federal backstop created by these laws has worked well and ensured that terrorism insurance is available and more affordable.”

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