Terrorism Still a Concern, Alliance Says

September 18, 2003

Insurers must begin planning now for the expiration of a federal terrorism insurance backstop program, even though there’s no guarantee that reinsurance will be available if the federal backstop is allowed to expire as planned at the end of 2005. That warning was sounded by experts at the Annual Underwriting Conference, held this week in Orlando by the Alliance of American Insurers and the American Association of Insurance Services (AAIS).

Even though the government is providing a partial backstop through the Terrorism Risk Insurance Act of 2002 (TRIA), the threat of another attack presents a real concern for insurers, said retired CIA intelligence expert Richard Coffman, president of Coffman Global Group.

“While we’re doing well overseas, the home-front is a serious concern,” Coffman told the audience of underwriters. “Despite costly security enhancements, U.S. seaports, utilities, transportation chokepoints, and nuclear and chemical facilities are dangerously vulnerable as we speak. And despite our foreign successes against Al Qaeda, it remains a dangerous and determined terrorist foe with thousands of well funded, well-trained terrorists at large, hidden in cells, increasingly underground and decentralized.

“I’m particularly concerned at our maritime systems, over which some 90 percent of global trade is conducted, and which may be the most vulnerable sector, in my view, among likely terrorist targets in this
country. Each container, each ship and each port facility is a potential delivery medium for a terrorist attack. An attack against our maritime transportation system is almost impossible to defend, but the results would be catastrophic.”

Deborah Colantuoni, senior vice president GeneralCologne Re, told the
audience that reinsurers will continue to limit or cap their exposure to
terrorism until they have a better ability to understand the risk and
price it accordingly. While TRIA temporarily took the pressure off reinsurers, there is no certainty that reinsurers will step back into
the market if TRIA is not renewed.

“I have to think a market will develop, it’s just a matter of how large
that market will be and what other capital markets are going to participate in it,” said Colantuoni. “I can also make a case that if TRIA goes away, there will no additional reinsurance capacity. A lot of
that is based on understanding of the risk, and as long as the reinsurance market has a general lack of understanding of the risk, they won’t be able to put a price to it.”

Mark Warshawsky, deputy assistant secretary of the U.S. Treasury
Department, said the government is finalizing plans for a survey of
insurers and insureds regarding terrorism coverage, with the first survey going out in early November.

According to Warshawsky, “The first surveys will be a retrospective —
‘What was the market just before the passage of TRIA and for 2003?’ There will be a second wave in 2004, which will probably be in early spring of 2004, and a last wave in early spring of 2005 to enable collection of data and a compilation of the report by 2005.”

Rita Nowak, assistant v.p. of property casualty for the Alliance of American Insurers, said insurers are concerned that if TRIA sunsets at the end of 2005, the limited availability of reinsurance currently on the market will totally disappear. She warned that the timing of TRIA’s expiration and the renewal of policies could cause operational problems.

“You will start having to issue policies shortly after the Treasury
Department surveys are concluded, not knowing is TRIA is going to be
continued,” said Nowak. “Exclusions, mid-term changes, conditional
endorsement wording and other mechanisms need to be considered because of the sunsetting of TRIA. The underwriters, the actuaries and the systems personnel will again need to go back to the drawing board to address these significant operational issues.”

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