AIA Stresses Need for Terrorism Backstop at California Conference

“The U.S. economy will suffer if a federal public/private partnership to insure against catastrophic terrorist attacks is not in place to continue beyond December 31, when the Terrorism Risk Insurance Act (TRIA) expires,” said Debra Ballen, American Insurance Association (AIA) executive vice president, at a “Future of Terror Insurance” conference held Monday at the University of Southern California.

Bolstering the AIA argument is new research by the RAND Center for Terrorism Risk Management Policy, which sponsored Monday’s conference; the new report was released in conjunction with the conference. “Terrorism Insurance and the Evolving Terrorist Threat” calls an adequate public/private partnership to insure against terror a national security issue because terrorists are likely to target vital institutions in the U.S. economy, and insurance is needed to compensate victims, sustain business operations during a disruption and rebuild damaged assets and infrastructure.

“RAND is one of the oldest and most respected institutions in the national security field, and the expertise of its staff on insurance matters makes them particularly well-suited to study this issue,” according to Ballen.

“RAND’s new report documents how vital a federal mechanism dealing with terrorism risk is to the economy. This is important because the threat of future catastrophic terror attacks on U.S. soil is real and evolving. A long-term public/private partnership must be able to evolve with the risk,” said Ballen.

“The report makes two crucial points. First, that the threat of catastrophic nuclear, biological, chemical and radiological (NBCR) attacks poses significant challenges for private sector insurers, and therefore, may more appropriately be covered through a direct federal government program. Second, that domestic terrorist attacks also should be covered by the program since foreign terrorists may ‘farm out’ attacks to local affiliates,” Ballen explained.

Ballen also emphasized that the workers’ compensation system is particularly vulnerable to crisis if a terrorism insurance mechanism is not put in place soon.

“For example, in every state, insurers must provide terrorism coverage in workers’ compensation policies. This provides essential protection to policyholders and their employees, but also means that workers’ compensation policies extending into 2006 face the possibility of being in force with no limit on potential terrorism losses; such open-ended liability is untenable for any company. As a result, insurers are being forced to evaluate how much workers’ compensation risk they can take on, especially for employers with highly concentrated groups of employees who could be harmed in a terror attack,” noted Ballen.

“We are working with our policyholders in all sectors to avoid any such dislocations by extending, and hopefully improving, the federal public/private partnership,” Ballen added.