Consumer Study Disputes Need for Renewal of Terrorism Reinsurance

The nation’s terrorism insurance law is not necessary to ensure the availability of affordable terrorism coverage for most areas of the country and should be allowed to expire, according to a study released by the Consumer Federation of America.

In its report, CFA found that insurance experts have set terrorism insurance rates quite low in most of the country and that, according to insurance risk models, private insurers will be completely responsible for all terrorism insurance losses in all but nine large cities by 2005.

“The insurance industry got a helping hand in the wake of 9-11 when Congress and the President agreed to offer free terrorism reinsurance backed by taxpayer dollars,” said J. Robert Hunter, CFA’s Director of Insurance, and a former Federal Insurance Administrator and Texas Insurance Commissioner. “Our study clearly documents that the insurance industry is more than ready to stand on its own two feet and that taxpayer back up should end. The ability of the industry to insure against terrorism is enormous and growing, profits are quite substantial and the financial condition of insurers overall is rock solid.”

In November of 2002, President Bush signed the Terrorism Risk Insurance Act. TRIA created a three-year program in which the federal government covers 90 percent of all terrorism-related insurance losses (up to $100 billion a year) after individual insurance companies pay an initial deductible. Insurers, who are required to offer terrorism coverage, must repay very little or no assistance. The act ends on December 31, 2005, unless renewed by Congress.

Major Findings

The CFA study, “The Terrorism Risk Insurance Act: Should It Be Renewed?” assesses current prices for terrorism insurance and the increasing ability of the property/casualty insurance industry to cover terrorism losses without taxpayer back up. CFA based its analysis in large part on a determination by the Insurance Services Office (ISO) that the risk of terrorism in the U.S. varies geographically.

* Areas with a high risk of attack are: New York City; San Francisco County; Washington, D.C., and Cook County, Illinois (Chicago);

* Areas with a moderate risk of attack are: Suffolk County, Massachusetts (Boston); King County, Washington (Seattle); Los Angeles County; Harris County, Texas (Houston), and Philadelphia County.

* The remainder of the country is at a low risk of attack.

The report has several major conclusions:

1. Terrorism insurance rates are relatively low in most areas of the country and will continue to be so when TRIA expires. This is because industry experts have concluded that most of the country has no significant terrorism risk under TRIA. Based on data collected by ISO, CFA estimates that terrorism insurance rates will be extremely low without the back up provided by TRIA when this law expires. For example, in the lowest risk areas of the country, CFA calculates that a $10 million building with $5 million in contents would cost only $300 to insure against terrorism once the law expires, the same cost as in the final year of TRIA. In moderate risk areas, this cost would only be $6,526 when TRIA expires, only $326 more than during the last year of the program.

2. The private sector will be responsible for covering all terrorism losses in all but nine large cities by 2005, before TRIA back up expires. Even in those nine areas, insurers will be covering the vast majority of the risk. This is according to the calculations of the Insurance Services Office model regarding the risk of terrorist attacks, including attacks using weapons of mass destruction (WMD) and other catastrophic possibilities. This means that the insurance industry should have the capacity to cover all but perhaps the most risky areas of the country without help from taxpayers. In the five moderate-risk cities mentioned above, private insurers will be covering 95 percent of the risk by 2005. In the four high risk areas of the country, insurers will be covering 70 percent of the risk.

3. Commercial insurance buyers in most of the nation are reluctant to buy taxpayer backed insurance coverage. This is because of the perception that terrorism will not impact them and that, even at very affordable rates, the price is too high. According to a recent survey by the Council of Insurance Agents and Brokers, half of the commercial brokers they questioned said that only 20 percent of their clients are actually buying federally backed terrorism insurance.

4. Industry experts have projected that terrorism losses to the insurance industry will be relatively modest. ISO has projected terrorism insured losses annually to be $5.75 billion before tax considerations. To put this projection into perspective industry losses on 9-11 were $40 billion before tax considerations. ISO thus projects a 9-11 level of loss just about every seven years.

5. Insurers are in an excellent financial position to cover all terrorism losses after TRIA expires. The profits of insurers selling TRIA-backed terror coverage are excellent now, as is the financial solidity of the industry. The return on equity for four of the five top stock insurance groups exceeded a very substantial 16 percent in 2003. These profits are expected to remain good for some years to come, as the industry continues to benefit from a “hard market” cycle that has kept premiums and profits high. Overall, the property/casualty insurance industry added 22 percent to policyholder surplus in 2003 (a whopping $65 billion) according to A.M. Best and Co. Meanwhile, financial soundness, which is measured by the amount of surplus the industry has compared to the coverage it has extended (net written premium), is very strong.

Public Policy Recommendations
Based on its findings of relatively low risk of terrorism attacks and low rates in much of the country, as well as strong industry profitability and financial soundness and the growing capacity of insurers to offer terrorism coverage, CFA found no compelling reason to extend TRIA at the end of 2005.

CFA maintais that the only possible reason Congress might want to consider some form of limited taxpayer back up after TRIA expires would be to assist the nine cities at moderate or high risk of terror attacks.

However, if Congress considers such a plan, CFA suggests it should:

* Consider targeting only the cities where the risk of attack is moderate or high. In fact, it is highly unlikely that the five cities at moderate risk of attack will need assistance, as 95 percent of all potential terrorism losses will be covered by the insurance industry by the end of 2005.

* Increase the deductibles that insurers must pay for losses in these few cities. CFA suggests an industry-wide deductible of $50 billion after tax considerations – a pre-tax deductible of $77 billion – for the first year of a renewed program. This should increase by $10 billion a year thereafter.

* Increase the share of losses that insurers must pay above the deductible amount from 10 percent to 15 percent, increasing by 5 percent a year.

* Only provide taxpayer back up for truly exceptional terrorist events, such as attacks with WMD, and

* Ensure that taxpayers pay no costs for backing up terrorism losses. The Treasury Department should require that insurers pay premiums for the coverage that taxpayers are providing that are actuarially sound, if a not a little higher than estimated taxpayer costs. Requiring insurers to pay rates that are slightly higher than estimated will encourage private insurance mechanisms to quickly compete by offering lower rates.

* Ensure that taxpayers pay no costs for backing up terrorism losses. The Treasury Department should require that insurers pay premiums for the coverage that taxpayers are providing that are actuarially sound, if a not a little higher than estimated taxpayer costs. Requiring insurers to pay rates that are slightly higher than estimated will encourage private insurance mechanisms to quickly compete by offering lower rates.

“This law is no longer necessary because the insurance industry is more than able to pay for most terrorism insurance losses in the future,” said Travis B. Plunkett, CFA’s Legislative Director. “However, if Congress decides to keep some form of back up, it should only target the few areas of the country where getting affordable terrorism coverage might be a problem. Congress should also require insurers to broaden the amount of coverage they offer, pay for the back up that taxpayers provide, and increase incentives for the development of a private insurance market that can cover all terrorism losses.”

The CFA report can be found at: www.consumerfed.org/terrorism_insurance_report.pdf.