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Experts: Federal Terrorism Insurance Report Misses Critical Issues

A White House report overstates the insurance industry’s ability to calculate and insure against terrorism risk, experts say, but the administration concedes — for the first time — that some risks, such as damage from nuclear or biological attacks, are uninsurable. The latter point suggests acknowledgement that long-term federal participation may be necessary to provide coverage.

The Oct. 2 report by the President’s Working Group on Financial Markets is bitter sweet to the Coalition to Insure Against Terrorism, the American Insurance Association and other groups that helped convince lawmakers to adopt the Terrorism Risk Insurance Act (TRIA) in 2002 and a two-year renewal of that act early this year. As part of TRIA’s renewal, Congress ordered the President’s Working Group (PWG) to research the long-term availability and affordability of terror coverage.

The report contends “insurers have made great strides in measuring and managing their risk accumulations.” It also suggests improvements in risk modeling have helped insurers assess potential frequency and losses from terrorist attacks, and have likely increased insurers’ willingness to offer coverage. Insurance organizations disagree, however.

“Insurance is about managing calculated risk, and part of the calculation is understanding the maximum possible loss and frequency,” says Julie Rochman, senior vice president at the American Insurance Association. “With terrorism, we can’t predict frequency at all, and with nuclear, biological, chemical or radiological attacks, the damages are potentially infinite.”

After the 9/11 attacks, most private terrorism insurance evaporated until November 2002, when TRIA compelled insurers to make the coverage available and provided federal reinsurance for the program. Without TRIA, insurers could drop coverage or raise premiums to astronomical levels, leaving properties without coverage that is now required by most lenders.

That would have devastating consequences for commercial real estate borrowers, according to loan servicer Bob Vestewig, managing director at Houston-based GEMSA Loan Services. After TRIA, terrorism policy premiums dropped 90% or more and have now become standard requirements on most commercial real estate loans. “We have terrorism coverage in place for probably 80% to 85% of our portfolio,” he says.

Yet that coverage could disappear without government participation, experts say. Despite the PWG report’s suggestions to the contrary, insurers are unable to calculate and manage terror risks in the absence of the federal backstop, according to Dr. James Valverde, vice president of economics and risk management at the Insurance Information Institute in New York. Private insurers would need access to federal intelligence, rather than risk models, in order to predict acts of terrorism, he says.

“[The report] is a gross overestimation of where the industry is at. This industry is in no better position today to assess and price terrorist risk than it was on Sept. 12, 2001,” Valverde says. “We are talking about acts of intentional malevolence. The only way to accurately predict such events is to be on the receiving end of intelligence data, and insurers are not in a position to avail themselves of the information they need to assess and price this coverage.”

Most distressing, perhaps, is the report’s contention that the TRIA backstop is competing against private re-insurers that would otherwise take a bigger share of the business. “We disagree,” says Martin DePoy, who chairs the steering committee at the Coalition to Insure Against Terrorism. “The Reinsurers Association has testified on Capital Hill a number of times that they sit on the sidelines because they cannot model this risk.”

DePoy finds some comfort in both the PWG report and another report published a week earlier by the General Accounting Office. Both conclude that private industry is unable to insure against damages from nuclear, biological, chemical or radiological attacks due to the potentially limitless losses. The Coalition hopes to convince lawmakers that those same principles apply to terrorism risk.

The current extension to TRIA expires at the end of 2007, and both private industry and Congress want either a permanent system or another extension ready to take its place by then. Some, like the American Insurance Association, have suggested modeling a permanent program on the United Kingdom’s insurance pool, in which insurers would contribute annually to a fund that will eventually take the place of federal reinsurance.

“We’re going to have our work cut out for us over the next year to try to extend the program or come up with an alternative,” DePoy says.

The next milestone in the road to a permanent program is the November elections, according to insurance researcher Valverde. When TRIA was up for renewal, a majority of House members seemed open to establishing a public-private solution to terrorism reinsurance while the Senate leaned toward the White House position of limited government involvement, he says. “These elections could change that dynamic, for the better or for the worse.”

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