Industry: Federal Terrorism Insurance Still Vital to National Security

Insurance industry advocates urged Congress today to ensure the availability of terrorism risk insurance through a continued federal government role and to examine long-term solutions before the current backstop legislation, the Terrorism Risk Insurance Extension Act (TRIEA) of 2005, expires at the end of the year.

“The current public-private partnership created by TRIA, and extended in TRIEA, has worked well, allowing businesses across America to continue operating and growing, and preserving jobs in the process,” said Tom Minkler, chairman of the Big “I” government affairs committee and an independent agent in Keene, N.H. Minkler testified before the Senate Committee on Banking, Housing and Urban Affairs today in a hearing titled “Examining the Terrorism Risk Insurance Program,” called to hear from a collection of insurance experts about the need for a long-term extension. “These laws have saved our economy millions of dollars by making terrorism insurance broadly available to all businesses that want and need this coverage at virtually no cost to the federal government. Prices have come down, capacity has grown, and demand is up in many geographic areas.”

Minkler noted that the insurance market’s ability to protect the American economy from the financial consequences of terrorism risk is a critical component of national security during the ongoing war on terror. Minkler said that terrorism risk coverage would become inordinately expensive and probably unavailable to many businesses if the federal role lapses.

“TRIA is scheduled to expire on Dec. 31, 2007, and there is no reason to believe that the threat of terrorism is on the decline, or that the private insurance markets alone can adequately meet our nation’s need for coverage,” Minkler said.

Don Bailey, CEO of Willis North America, a subsidiary of Willis Group Holdings, agrees that the federal program has stabilized the market and made affordable terrorism coverage available to businesses across the country. Bailey, who testified before the Senate Banking Committee on behalf of Willis and The Council of Insurance Agents & Brokers, said TRIA has been an unqualified success, and allowing it to expire at the end of this year would be “economically devastating.”

“The most important issue for the broker community is maintaining access to coverage at a price the business consumer can afford,” Bailey said. “In order to get this access, we need insurers who are able and willing to provide the coverage. It is clear that they cannot and will not be able to provide terror coverage without a federal backstop or some other mechanism to cap their exposure.”

Both Willis and The Council favor a permanent or long-term government backstop program, Bailey said.

The Big “I’s” Minkler added that terrorism insurance coverage is not just a “big city” or a “big business” problem. “It is a business customer problem throughout the country,” he said. “As take-up rates have gone up across the country, we have seen terrorism coverage purchased by a wide and diverse variety of interests, from small towns in Mississippi to small and large businesses in New York City.”

Willis’ Bailey stressed take-up rates for terrorism coverage is not limited to urban areas or particular industries.

“Industry reports indicate that the take-up rates are high across the country and across industries, and policyholders are generally willing to purchase terrorism coverage when it is available at an affordable price,” Bailey said. “For companies with a higher perceived risk, whether due to size, location, industry or other factors, the take-up rates are even higher.”

He said take-up rates for terrorism insurance are highest in the Northeast and Midwest, followed by the South and the West.

“Within specific industrial sectors, the largest percentage of insureds buying terrorism coverage were in real estate, financial services, health care, media, hospitality, transportation and education. Even companies in the sectors with comparatively low take-up rates – energy and manufacturing, for example – each had take-up rates exceeding 30 percent in 2006.”

The relatively high take-up rates are a sign of progress “toward the public policy goal of encouraging coverage in affected areas and industries,” Bailey said. By comparison, only 11 percent of California customers are buying earthquake insurance despite the fact that the likelihood and severity of a major earthquake

Insurers also reiterated the need for a long-term federal solution to terrorism insurance.

The Property Casualty Insurers Association of America (PCI) testified before the committing, again urging prompt congressional action to introduce legislation that will continue to make terrorism insurance available from the maximum number of sources.

“This issue is a top priority for the entire business community and the nation’s economy,” said Ben McKay, PCI’s senior vice president for federal government affairs. “TRIA has an expiration date but the threat of catastrophic terrorist attacks never expires. It is crucial that commercial insurance buyers can be certain that the protection against financial losses from a terrorist attack will continue to be available to them after Dec. 31, and a long-term program with low program triggers is the best way to provide that certainty.”

Supporters of a federal back-stop to terrorism insurance say that because acts of terrorism are unpredictable, it is virtually impossible for insurers to assess risk. TRIA has created an environment in which 60 percent of large to mid-sized businesses purchased terrorism insurance in 2006, compared to 27 percent in 2003, according to PCI. Additionally, the cost for property terrorism insurance has dropped 54 percent for smaller businesses, making it more affordable for them as well, PCI claims.

PCI advocates a long-term program that does not differentiate on the basis of the type of business that buys the coverage, the type of weapon used in a future attack, or the type of insurer that provides the coverage.

“From virtually all sectors, there is widespread agreement that terrorism risks are largely uninsurable, and that the federal government needs to play an ongoing role in protecting businesses, employees and, indeed, the entire national economy from the devastating financial consequences of a terrorist attack,” McKay said.

“Characteristics that make terrorism an uninsurable risk remain as strong today as they were immediately following September 11, 2001,” stated Charles Clarke, vice chairman of Travelers, who testified on behalf of the American Insurance Association (AIA). “Most experts agree that it is not a matter of if, but when, another catastrophic attack will occur on U.S. soil. A continued, vibrant federal terrorism risk insurance program therefore remains vital to the national security and economic well-being of our nation for the foreseeable future,” Clarke said.

Noting that the Terrorism Risk Insurance Act (TRIA), and the TRIA Extension Act (TRIEA) have worked by making terrorism insurance widely available to U.S. businesses, Clarke made the case for a continued public-private mechanism for management of terrorism risk that increases federal financial participation in the event of a chemical, nuclear, biological, and radiological (CNBR) attack.

Clarke pointed to themes contained in an October 2006 report by the President’s Working Group on Financial Markets (PWG), which noted the present absence of a private market for CNBR terrorism risk insurance, and little potential for a private market for this type of terrorism risk to emerge in the future. “These conclusions are entirely consistent with those of a contemporaneous report by the Government Accountability Office on CNBR terrorism risk,” Clarke noted.

Clarke also outlined approaches for developing an effective and fiscally efficient federal program for the public-private management of terrorism risk. These include keeping the existing TRIEA backstop in place for conventional terrorism risk, expanding the federal government’s financial role in managing CNBR terrorism risk, eliminating the artificial distinction between foreign and domestic terrorism, reviewing the program’s current $100 million trigger to better help small and mid-sized insurers, and preempting burdensome state rate and form regulation with respect to terrorism insurance rates and policy forms.

“Extending the life of TRIA, expanding the program to better encompass NBCR exposures and readjusting its terms to address the changed parameters will keep terrorism coverage available and the market and economy stable,” Willis’ Bailey said.

Additionally, PCI said it hopes for future, more in-depth discussions on this issue with respect to many sectors whose concerns are yet to be addressed, including the Treasury Department, small companies, farm multi-peril, state residual workers’ compensation, general liability, personal lines and risk retention.

“This hearing is a great start, but other stakeholders in the TRIA debate also need to be heard from,” McKay says. “We think it is of vital importance that everyone involved should have a voice in this discussion going forward, because it is an encompassing issue that touches on a plethora of sectors of our economy and our country.”

Willis’ Bailey said the nation has come a long way since TRIA was first enacted, with the terrorism insurance market largely stabilized, terrorism coverage steadily expanding and the price of coverage becoming more affordable.

“All of this provided relief that is essential to the smooth functioning of our economy,” Bailey said, and it did so without the expenditure of one cent of taxpayer money.

Despite those successes, Bailey said, the threat of terrorism remains “unabated and unpredictable,” and this is not the time for the federal government to cease its involvement in the terrorism insurance market.

“Allowing TRIA to expire at this time will certainly cripple, if not completely paralyze, a significant portion of our economy,” he said.

Source: IIABA, Willis, PCI, AIA,