Terrorism Insurance Still on Front Burner for Insurers, Lawmakers

Amid heavy lobbying on the part of financial lenders, insurers, real estate executives and even President Bush, the Democrats and Republicans in the Senate seem to have come to agreement that there is need for some kind of governmental role in providing terrorism insurance and have revived legislation that addresses the issue.

However, the stumbling blocks that sidelined a Senate terrorism insurance bill late last year have not been resolved. According to the New York Times, “the parties have yet to resolve differences over limiting the damages victims could collect from insurers and other businesses.”

The Senate bill provides that insurers would pay for initial losses up to several billion dollars per incident and the government would pay up to 80 percent of remaining losses up to $10 billion. For losses exceeding $10 billion, the government would take on a 90 percent share of the loss.

Addressing reporters at Camp David on May 3, Bush acknowledged that recent reports about the pace of growth and unemployment have shown variable results. He lamented the country’s current lack of business investment and attributed sluggish growth reports in part to the lack of terrorism coverage. He said that in order to establish long term growth, “we need a trade bill, and … we need terrorism insurance.” Later that day, White House spokesperson Ari Fleischer reinforced Bush’s remarks, stating that the President, “hopes that Congress will pass trade promotion authority, which will create jobs, take action on energy legislation to create jobs, and pass terrorism insurance, which can also help to create jobs in our economy.”

Although terrorism coverage has become increasingly available, that which is obtainable is usually limited in its scope. During an audio conference on terrorism insurance for commercial real estate held in March by the Risk Management Association (RMA), Richard Thomas of AIG indicated that the market for terrorism insurance for commercial properties is in a state of flux. He said that AIG believes there to be around $300 million per building in available capacity, which is not sufficient to cover many of the high value, high profile properties in New York City and other major U.S. cities. The pricing for such coverage falls in the 5 percent to 25 percent of total insured value range.

Location, target value, physical characteristics of the property, height, whether it’s a symbol of America and the profile of the tenants are factors that underwriters consider when pricing policies for commercial properties, according to Thomas.

Warren Buffett, whose company Berkshire Hathaway Inc. owns General Re, one of the world’s largest reinsurers, renewed his call for a U.S. government-backed terrorism insurance program at his company’s annual meeting held May 3 -5 in Omaha, Neb. According to a Reuters report, Buffett told the 14,000 shareholders attending the annual Buffet love-fest, that insurance firms selling terrorism coverage are taking serious risks that could put them out of business. Predicting that there will be more attacks on the U.S., Buffett said some companies are exposing themselves to ruin. Suggesting that a major nuclear event is bound to happen in the U.S. eventually, Buffet stated, “It will happen. Whether it will happen in 10 years or 10 minutes, or 50 years … it’s virtually a certainty.”

However, Buffett reassured his stockholders about the future of his company. Despite the fact that General Re does provide some reinsurance cover for terrorism, the policies it offers are strictly capped and the payout amount is a known quantity. Buffett asserted that although Berkshire is “selling more terrorism coverage” than others, the company is not in danger, in part because of the huge amounts of investments held by Berkshire.

Not everyone is on the government-backed terrorism insurance bandwagon, however. Consumer groups, such as the Consumers Union and the Consumer Federation of America, have come out against “legislation that would give away insurance in the event of future terrorism attacks.” The groups insist that factors such as the increasing availability of terrorism coverage, the fact that banks are still loaning money to the majority of businesses, and insurers’ improving financial positions negate the need for government-supported terrorism coverage.

“The President proposes to give away insurance worth tens of billions to an industry that is flush and on the cusp of huge profit increases,” Travis Plunkett, CFA’s legislative director stated. The groups are urging President Bush to instead “spur the creation of private alternatives to the over-priced insurance of today’s market.”

But the consumers groups may not get their wish, as the Senate appears willing to work on the issue. As leading backer of government support for terrorism insurance, Sen. Charles Schumer, Democrat of New York, told the New York Times, “Sentiment to pass a terrorism insurance bill is growing day by day among the members of both parties.”

Topics Catastrophe Carriers USA Natural Disasters New York Legislation