June 24th, 2009

Global Terror Update: United States

Posted at 1:00 AM ET

global_cover141x141The Terrorism Risk Insurance Act of 2002 (TRIA) was extended in 2007 for another seven years, following a two-year extension passed in 2005. TRIA, in its current iteration, requires insurers to offer coverage to a large majority of commercial policyholders. In return, carriers receive reinsurance protection above a deductible, calculated at 20 percent of direct earned premium. They are also subject to 15 percent co-insurance.

Following the terror attacks of 2001, insurers moved to eliminate cover from their policies. The United States created a program to support the insurance industry in providing terror cover to ensure that adequate coverage remained available and to mitigate the effects of a future catastrophe on the broader economy. The U.S. Congress passed and implemented TRIA to provide a financial backstop for commercial insurers from potential insolvency arising from underwriting terrorism risks. Per the latest extension, TRIA is set to expire at the end of 2014.

In a document on budget cutbacks totaling USD17 billion, the Obama Administration on May 7, 2009 proposed scaling back the TRIA program. Industry observers viewed the proposal as more of a political statement than a formal statement of policy. Having spent so much time passing the renewal of TRIA in 2007, Congress is not believed to be willing to revisit the legislation for some years.

The issue of terrorism cover has been addressed at the state level as well. Prior to the events of September 11, 2001, 31 jurisdictions had laws that required that property policies be based on the “1943 New York Standard Fire Policy” (SFP). The SFP contains few exclusions and does not exclude terror as a cause of loss by fire. Further, the hazard of “fire following” an event is covered even if the peril that causes the fire is not covered in the policy. SFP laws have prevented insurers from denying cover for fire caused by terror events, even in cases where insurers had terror exclusions.

According to the National Association of Mutual Insurance Companies (NAMIC), 14 states have allowed terrorism exclusions to be added to the SFP since September 11, 2001: Arizona, Connecticut, Idaho, Louisiana, Michigan, Minnesota, Nebraska, New Hampshire, North Dakota, New Jersey, Oklahoma, Pennsylvania, Rhode Island, and Virginia.

Study on NBCR by United States Government Accountability Office (GAO)

While the September 11, 2001, terrorist attacks killed nearly 3,000 people and resulted in an estimated USD32.5 billion in insured losses as of 2006, analysts estimate that casualties and property damage involving unconventional weapons (e.g., Nuclear, Biological, Chemical, and Radioactive materials) could be substantially worse in some scenarios. For example, in a RAND Corporation simulation of a terrorist-detonated nuclear explosion in the Port of Long Beach, California, instant fatalities were estimated to be 60,000, with another 150,000 estimated to require emergency medical treatment. Losses could reach USD1 trillion.
Although TRIA requires companies that offer commercial property/casualty insurance (i.e., coverage for building damage and related legal costs for injuries to third parties) to provide coverage for terrorist attacks and specifies that the federal government assume a significant share of the associated financial responsibility, insurers’ standard exemptions may exclude coverage for terrorist attacks involving NBCR materials.

The reauthorization of TRIA in 2007 directed the GAO to review: (1) the extent to which insurers and reinsurers offer coverage for NBCR attacks, (2) the factors that contribute to the willingness of insurers and reinsurers to provide coverage for NBCR attacks and their ability to manage these risks, and (3) any public policy options for expanding coverage for these risks, given current insurance market conditions.

Representatives of most commercial property/casualty insurers said that they continue to exclude coverage for terrorist attacks involving NBCR materials, and representatives from several reinsurance companies that do offer such coverage reported placing significant restrictions on it. Insurance representatives reported that they continued to rely on long-established exclusions, such as the nuclear and pollution exclusions, to exclude or limit coverage. However, some insurance industry participants said the applicability of these exclusions could be challenged in court because they were not specifically developed to address terrorist attacks.

Representatives from life and health insurers also reported that state regulators generally have not permitted them to exclude NBCR risks from their policies.

Commercial property/casualty insurers and reinsurers generally limit NBCR coverage strictly because of the uncertainties about the risk and the potential for catastrophic losses. Insurers that are required to provide such coverage — in workers’ compensation, life, and health — reported challenges in managing the associated risks.

In its study, GAO reviewed some proposals to address the NBCR issue, but did not make any recommendations. 

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