As reported by the New York Times on March 16, a Department of Homeland Security (DHS) report concludes that future terrorist attacks could occur in both metropolitan and rural areas, putting to rest a popular theory that terrorists will target only the nation’s large urban centers.
The report, which is intended to allow the DHS to focus its resources on identifying and preventing attacks on the most likely targets, reportedly demonstrates the need for Congress to act this year to extend the Terrorism Risk Insurance Act (TRIA) and put into place a long term terrorism insurance solution for businesses in all parts of the country.
The DHS report identified blowing up chlorine tanks; spreading disease in airports, sports venues and train stations; infecting livestock with diseases; detonation of a nuclear device in a major city; release of nerve gas in an office building; and the bombing of a sports arena as the most plausible or devastating attacks.
“The DHS list includes all types of industry in all segments of the country,” said Carl Parks, senior vice president, federal government affairs for the Property Casualty Insurers Association of America (PCI). “Agricultural in the heartland is just as likely to be attacked as skyscrapers on the eastern seaboard. No matter where an attack happens, the cost in human life and economic damages could be as devastating, if not more so, than the 9/11 attacks. Just as the DHS is working to identify possible attacks and specify what government agencies should do to prevent, respond to and recover from them, insurers are working to develop a long term solution to the problem of financing the cost of such risks.”
Parks made his remarks at an event this week cosponsored by the PCI and the U.S. Chamber of Commerce designed to increase awareness in the business community and on Capitol Hill of the need to extend TRIA and to develop permanent solutions to the problem of insuring against terrorism.
The program is designed to educate business consumers and public policy makers on the unique risk terrorism poses to the economy and the reasons why a private market for insuring inherently unpredictable risks of catastrophic size, such as terrorist attacks, cannot be made to work without some level of federal involvement.
TRIA was enacted in the wake of the 9/11 attacks, which resulted in insurers paying nearly $35 billion in claims, the largest insured loss in history.
The intent of the program was to provide a short term federal financial backstop to foster a competitive market for terrorism insurance. TRIA requires insurers to offer coverage to their business insurance clients and pay claims for terrorism losses. After a significant individual insurer deductible has been met (15 percent of direct earned premiums in 2005), the federal government pays 90 percent of insured losses.
According to a recent survey conducted by the Council of Insurance Brokers, approximately 44 percent of business insurance consumers elect to purchase terrorism insurance. TRIA expires on Dec. 31, 2005. Without TRIA – or a long term solution to financing terrorism risk – in place, the availability of such coverage may be limited and prices are reportedly likely to increase.
“As the DHS report points out, terrorism is a national economic security problem that requires a long-term, national response,” said Parks. While a TRIA extension would provide some additional time to implement a long term solution that relies more on the private market than the federal government, PCI is urging Congress to consider creative solutions to financing terrorism risk and creating a healthy and competitive market for such coverage.”
Parks also referenced a March 11 editorial from Majority Leader Tom Delay (R-Texas) to be published in PCI’s member newsletter that stresses the importance of private market solutions that do not involve federal government serving as a reinsurer or permanent backstop.
PCI President and CEO Ernie Csiszar was scheduled to testify before a March 3 Senate Banking Committee hearing on TRIA. That hearing was postponed will be rescheduled in the near future. When the hearing is held, Csiszar will reportedly acknowledge the need for a public/private partnership to effectively develop a long term solution to the problem of financing terrorism risk, but will also outline several alternative approaches to address the issue, including:
· Federal support giving insurers and insurance markets more freedom to negotiate terms and conditions of coverage by overriding state requirements on pricing and prohibitions of exclusions.
· Accepting an increase in retention levels so that private insurers accept more of the responsibility for paying terrorism insurance losses, coupled with a program that allows insurers to reduce their own individual retention levels.
· Enabling the industry to form a tax-exempt entity or entities to provide reinsurance or to allow companies to reduce their individual company retention level to some manageable level.
· Allowing the accumulation of funds through the establishment of individual company tax-deferred reserves.
“Right now these are just ideas, not fully developed solutions,” said Parks. “PCI has been reviewing the merits and consequences – including unintended ones – of each and the association is committed to working with Congress to explore these options and create a solid, long term public/private partnership to address this critical problem.”
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