The federal government must continue to reinsure private market insurers if the U.S. is to establish a realistic, long-term solution to insuring terrorism risk, according to participants at a public hearing on terrorism exposure in New York.
Insurers believe support from the U.S. treasury is essential if the industry is to avoid widespread insolvencies in the wake of an attack. They say terrorism risk is as uninsurable now as it was in 2002, when the Terrorism Risk Insurance Act was passed. This act created a three-year government backstop for big terrorism losses. That backstop has now been extended until the end of 2007.
“Because terrorism risk remains inherently uninsurable, any long-term solution must include a substantial financial commitment from the federal government,” said Robert Detlefsen, director of public policy at the National Association of Mutual Insurance Companies.
Ted Kelly, chairman, president and chief executive of Liberty Mutual, the sixth-largest property/casualty insurer in the U.S., agrees. He adds that, unlike with natural catastrophes, probabilistic models are of little use when estimating terrorism exposures.
“Tell the [President’s] Working Group [on Financial Markets] that the industry is severely limited in its ability to price for terrorism risk,” he told those attending the March 29 hearing. “There are no models to tell us anything about frequency, and the models that assess severity are frightening in their estimates of loss.”
The federal government has expressed a desire to reduce its participation in the terrorism backstop. It wants the private market to find its own solution. But insurers counter that they will be unable to offer affordable terrorism coverage if they cannot access affordable reinsurance themselves.
The Reinsurance Association of America estimates that private reinsurers have between $4 billion and $6 billion of capacity available for terrorism risks. Almost all of this excludes coverage for nuclear, biological, chemical and radiological (NBCR) attacks, which most companies deem too risky.
Debra Ballen, executive v.p. of public policy management for the American Insurance Association, believes the government should assume the NBCR portion of all Tria-covered business. An NBCR attack on New York could generate $778 billion in insured losses – nearly double the industry’s surplus – according to Michael McCarter, chair of the American Academy of Actuaries’ terrorism risk insurance subgroup.
Other industry solutions include: allowing insurers to accumulate tax-free reserves for handling losses, arranging voluntary pooling between companies, having more relaxed rate and form filing rules so insurers can introduce rate increases faster, and removing the distinction between foreign and domestic acts of terrorism.
Some have suggested having a privately-funded buffer between insurers and the federal government, using catastrophe bonds and insurance-linked securities for protection. But they stress these capital markets tools can only solve part of the problem.
“Everything we learn from experts in the capital markets suggests that securitisation could be an element of a solution, but would not generate enough capacity to be the sole solution,” said insurance agent Sharon Emek on behalf of the Independent Insurance Agents & Brokers of America, a trade association.