The commercial insurance marketplace cannot effectively price and underwrite terrorism coverage because there still is no effective modeling, so any long-term solution to the terrorism risk coverage must involve the federal government, in the opinion of U.S. commercial insurance brokers.
The Council of Insurance Agents and Brokers, which represents commercial insurance intermediaries, told the U.S. Treasury Department, which is seeking input on the long-term availability and affordability of terrorism risk insurance, that the ultimate solution is one that “results in affordability, increased availability and increased certainty in the terrorism insurance marketplace.”
In a letter to Treasury officials, the brokers did not voice a preference for one particular approach.
Treasury is collecting comments as it seeks to evaluate the market solutions that may be needed when the current extension of the Terrorism Risk Insurance Act (TRIA) expires at the end of 2007. Treasury is reviewing options for a permanent solution to the problem of terrorism insurance.
The Council said that a look at the market response at the end of 2005, when it was unclear whether Congress would extend TRIA for two more years, offers a preview of what would happen if the federal backstop ended without another program to take its place. The Council said in late 2005, the availability and pricing of coverage varied greatly according to exposure.
“For medium and large insureds with little or no exposure – i.e., businesses in low risk industries located way from high risk areas – property coverage for terrorism was generally available at reasonable prices,” The Council said. “In contrast, insureds in areas with high concentrations of risk (urban areas), in high-risk industries or properties perceived as ‘targets,’ capacity was low, and prices were high. This is also true of large insureds seeking large amounts of terror coverage.”
Thus, according to the brokers, it appears that without TRIA, reasonably priced coverage “would not be available for those that need it most.”
The insurance industry claims that the reason terrorism coverage is subject to extremes in availability and pricing is because it is impossible to predict the likelihood of a terrorist event.
Since effective models to predict terrorist events aren’t available, insurers appear to be relying increasingly on mitigation efforts such as maintenance, surveillance systems, security and personnel selection processes when making underwriting and pricing decisions on terrorism coverage, according to the brokers trade group. But such assessments also are limited in their effectiveness when it comes to forecasting vulnerability to terrorist attacks because the information really necessary to evaluate risk is often found only in classified government intelligence data, insurance experts add.
“Although mitigation efforts may be helpful, there are certain events for which it is difficult, if not impossible to prepare,” The Council said. “Indeed, as the events of 9/11 proved, policyholders are often at the mercy of government, law enforcement and others to decrease risk of terrorism. No mitigation efforts could have been employed by the owners of the World Trade Center to decrease the likelihood of planes being flown into buildings.”
Although more than four years have passed since the Sept. 11, 2001, attacks, the brokers maintain that private terrorism insurance capacity has barely increased, and reinsurance coverage for terrorism risk remains inadequate.
“In the absence of TRIA or some sort of federal government involvement, reinsurers would not be able to provide sufficient capacity to the market for terrorism insurance and, indeed, even the limited amount of capacity they currently provide would likely shrink,” The Council said.
The Council maintained that financing mechanisms such as alternative risk pools or catastrophe bonds cannot generate sufficient capacity to deal with catastrophic risk from a terrorist attack. Although these mechanisms might eventually add additional market capacity, “it will take years to develop and will not single-handedly solve the capacity problem,” the group said.
“TRIA has provided stability to a volatile marketplace by providing insurers with a federal backstop so they can make terrorism insurance available to consumers,” The Council said. “It is clear, however, that the private sector currently does not have the capacity to cover terror losses absent the federal backstop and is not likely to have that capacity when TRIA expires on Dec. 31, 2007. Thus we believe that any long-term solution to the issue must include federal government involvement.”
Source: The Council of Insurance Agents and Brokers
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