A continuing federal role in terrorism insurance is important so that U.S. financial centers including New York City can continue to compete with international markets, many of which are already covered by similar government insurance programs, New York Acting Superintendent of Insurance Eric Dinallo told a Congressional panel in Manhattan today.
Dinallo told lawmakers that relying solely upon private markets to provide terrorism insurance would mean that only businesses in New York City, Washington, Chicago, Houston and other large cities seen as targets would buy terrorism insurance.
“Thus, instead of the risk being shared or pooled, it would be concentrated. That would increase the cost of doing business in our largest cities and hurt their ability to compete with cities in other countries, especially those which do provide a government backstop for terrorism insurance,” the state insurance regulator said in urging renewal of the Terrorism Risk Insurance Extension Act (TRIEA), which will expire at the end of the year unless Congress acts.
Dinallo made his remarks before a subcommittee of the House Committee on Financial Services, which came to Manhattan to hear views on extending the federal terrorism insurance program.
Dinallo said that in addition to a federal backstop, private markets and even local governments must continue to do their part to deal with the risk of terrorism.
Noting that New York State and its business community spend billions of dollars to reduce the risk of future terrorism, despite the presence of the federal government program, he argued that the federal government must also recognize the benefits of concentrated financial centers.
“It is not a realistic to spread the financial services industry throughout the country, so there is no one financial capital vulnerable to attack. There are still many strong benefits to concentration,” he argued. “That’s why the competition for New York comes from other financial centers, such as London, Tokyo and Hong Kong. And if New York is no longer the world financial capital, the alternative is not going to be another city in America, it’s likely to be one of those foreign cities that are already competing for that title.”
New York City Mayor Michael Bloomberg said that the N.Y. City police department has built intelligence and counterterrorism operations that are monitoring and responding to threats as they arise. Also, in his own budget he has proposed an investment of $15 million in the Lower Manhattan Security Initiative, which will help safeguard bridges, tunnels, and other infrastructure downtown.
But state and city governments need the federal government to stay involved, Bloomberg said.
“[S]hould the worst happen, we also must be fully prepared to minimize the impact on our 8.2 million citizens, as well as the millions of commuters and tourists who come here each day. This preparation includes not only strengthening rescue and recovery operations, but also taking preventive steps to stabilize the city’s economy in the event of an attack. The federal government’s leadership in enhancing the availability of commercial insurance has been – and must remain – a crucial part of this strategy,” he told the Congressional panel.
Bloomberg also said current real estate projects in the city are on course to create “hundreds of thousands of new jobs” and more than $10 billion in additional property tax revenue each year.
“Their importance to our economy cannot be overstated. But without terrorism risk insurance, none of them would ever get off the ground. And if projects like this are put in jeopardy… so will the future of our city – the global financial leader for America.,” Bloomberg warned.
In addition to government, the private insurance market must do its part, Dinallo stressed.
“I don’t believe in letting the insurance industry completely off the hook. Quite the opposite, it is essential that we continue to take measures to increase the private market’s ability to take on as much terrorism risk as possible,” he testified.
Dinallo cited an estimate by the American Academy of Actuaries that a large nuclear, biological, chemical or radiological (NBCR) event in downtown Manhattan could cause insured losses (property/casualty and group life insurance) of $778 billion. However, he cautioned, in 2005 the aggregate capital for all property and casualty lines was $427 billion and less than half of that is used to support the insuring of commercial enterprises.
“Obviously, even a small number of huge possible losses of that size will substantially increase the mean, pushing premiums to unaffordable levels,” he explained. “What the federal backstop does is eliminate the very, very large losses and thus cuts off the tail. That substantially reduces the mean and thus reduces premiums that insurers must charge and makes them more affordable.”
He said if the country were to rely solely upon private markets without a government backstop, insurers would have to charge to cover the largest potential risks and prices would rise so high that only those who “absolutely had to buy terrorism insurance would do so.”
He warned of dire economic consequences if Congress fails to renew TREIA so that coverage is in place as of Jan. 1, 2008.
“Without a federal backstop, property insurance, especially in our urban cities, will become unavailable or unaffordable. Trophy properties across the nation, including hospitals, stadiums, and government buildings, will be significantly impacted and real estate and construction projects could come to a standstill,” Dinallo argued.
There are global concerns as well, according to Dinallo.
“The uncertainty surrounding the expiration of TRIEA also affects our competitive position internationally. Other nations with serious terrorism problems have permanent programs in place to ensure terrorism insurance is available. A long-term American solution to the terrorism exposure is long overdue,” he said..
He urged Congress to tweak the existing TRIEA program so that it covers foreign and domestic events, expands coverage to group life insurance, and provides a mechanism to leverage the private market strengths in covering NBCR risks.
“Terrorism insurance is crucial to the healthy functioning of the American economy, and in the absence of private market capacity, federal involvement is essential,” he concluded.
Dinallo worked for large insurance broker Willis and before that for then-Attorney General Eliot Spitzer before Gov. Spitzer named him insurance superintendent. His nomination is awaiting state Senate approval.
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