Posted on 04 Aug 2010
The federal government has been soliciting comments for a study on terrorism risk insurance, and the insurance industry has delivered an earful, arguing that terrorism cannot be covered without governmental help.
The President's Working Group on Financial Markets asked for comments on the Terrorism Risk Insurance Act in a July 17 request in the Federal Register. The group is, by law, required to produce a report on the program this year -- expected within a few months -- and in 2013, just before its current expiration in 2014.
"Going forward, we're going to definitely need this," Marliss McManus, senior federal affairs director for the National Association of Mutual Insurance Companies, said. "Large-scare terrorism is fundamentally an uninsurable private-market context. It's necessary to have a public-private partnership moving forward."
So her organization explained to the president's working group that "there is no self-sustaining private market and one is unlikely to develop. Private capital markets have shown little interest in assuming terrorism risks and absolutely no appetite for assuming risks for weapons of mass destruction."
J. Stephen Zielezienski, senior vice president and general counsel for the American Insurance Association, also wrote a response letter underlining the need for "market-stabilizing" TRIA. "Most experts do not believe that the elements necessary for the private insurance market alone to assume this risk currently exist or are likely to be present as long as the terrorist threat remains highly volatile," he wrote.
As the federal working group acknowledged in its recent request for comments, its previous 2006 report found "little potential for future market development of terrorism risk insurance for losses associated with chemical, nuclear, biological, and radiological attacks," though it pointed out that the market has been improving.
"On fundamental issues, to our knowledge, nothing has changed since 2006. Terrorism continues to be a significant risk and continues to be uninsurable without government participation," Zielezienski wrote. "A financially sound federal terrorism insurance program, combined with the removal of regulations that discourage private insurers from maximizing capacity, provides the best path to long-term affordability and availability of terrorism insurance in the United States."
Though the lawmakers establishing TRIA in 2002 had hoped a self-sustaining private insurance market might develop, the program was given a seven-year extension in 2007 (BestWire, Dec. 18, 2007). The industry hopes for a further extension before 2014.
This latest request for comments sought market and policy availability information. The final question in the request was: "In the absence of the program, in what forms, at what levels, under what terms and conditions, and at what price might terrorism risk insurance be available?"
"I think they really thought that eventually a private market could develop, but I don't think they truly understand terrorism risk," McManus said. "It's a peril that you can't model for, can't predict. A private market just can't develop."
According to the National Association of Insurance Commissioners' position on the issue: "In the absence of private market innovations and solutions, sustaining a viable private market for terrorism insurance depends on a federal backstop."