A new federal government report concludes that a totally private market solution to insuring against certain terrorist attacks is unlikely in the near future. The report covers the risk of nuclear, biological, chemical or radiological (NBCR) attacks only and does not address insurance for terrorist attacks by more conventional weapons.
Insurers immediately expressed disappointment with the report’s suggestion that any government backstop could deal with NBCR terrorist risks only and not the broader risk of terrorism regardless of the choice of weapon.
“Given the challenges faced by insurers in providing coverage for, and pricing, NBCR risks, any purely market-driven expansion of coverage is highly unlikely in the foreseeable future,” the report prepared for Congress by the U.S. Government Accountability Office concludes.
Congress is about to begin debate over renewal of the Terrorism Risk Insurance Act which provides a government backstop for the private terrorism insurance market. A hearing, “Protecting Americans from Catastrophic Terrorism Risk,” is scheduled to be held jointly by the House Committee on Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises and the Subcommittee on Oversight and Investigations tomorrow, Wed., Sept. 27.
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 report says.
It also notes that insurance experts believe that the potential severity of NBCR risks alone could diminish the willingness of some insurers to insure NBCR risks.
According to the GAO, although NBCR risks may not fully satisfy the principles of insurability, some lines of insurance still cover some or all of the risks. For example, even with TRIA, property/casualty insurers generally have excluded nearly all NBCR events from coverage, both for commercial property/casualty and homeowners, although some of the exclusions could be challenged in courts. However, workers’ compensation, life, and health insurers generally have not excluded NBCR risks from coverage. Many states limit the exclusion of perils for workers’ compensation. Life and health insurers face other challenges in segregating and excluding NBCR risks.
However, the report continues, workers’ compensation, life, and health insurers are concerned that the prices they currently charge may not cover their potential exposures to NBCR risks, sometimes because of regulatory limitations, and generally because of difficulties in measuring and pricing for NBCR losses.
Overall, the GAO concludes, “any purely market-driven expansion of coverage is highly unlikely in the foreseeable future. ”
The Terrorism Risk Insurance Act (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. 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.
GAO collected information from some of the largest insurers in each line of insurance, associations representing a broader cross section of the industry and state insurance regulators.
In an initial response, insurers disagreed with the suggestion in the report that government support should be limited to only NBCR risks.
The Property Casualty Insurers Association of America (PCI) urged Congress to replace the TRIA with a long-term, market-based solution to terrorism risk insurance that does not arbitrarily pick winners and losers based on the type of attack, as an NBCR-only approach would do.
“The GAO report demonstrates the difficulty that insurers and consumers have understanding and protecting themselves against this risk,” said Ben McKay, PCI senior vice president, federal affairs.
“While we’re pleased that it 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.”
According to McKay, “The real issue is terrorism itself and its uninsurability, not the specific weapon a terrorist may decide to use.”
“There is a growing consensus in Congress that is committed to finding a long-term, market-based solution with a continuing role for the federal government,” he maintained.
In its response, the American Insurance Association (AIA) claimed that the GAO report “confirms that NBCR risks are particularly and wholly uninsurable in the private insurance market because of the potential, virtually infinite risk of loss, and because of the horribly unique characteristics of such attacks.”
At the same time, AIA said the report also confirms that “there is no appetite in the private sector capital markets (including the private reinsurance market) for NBCR risks – and does not appear that such an appetite would develop in the absence of a federal terrorism risk insurance mechanism. ”
Insurer groups are expected to testify at the House committee hearings tomorrow.
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