Preparing for the Unthinkable

Although another terrorist attack is a concept too awful to imagine, as an industry, our job is to protect against the unthinkable. That’s why insurers and reinsurers alike are lining up to support the creation of a federally backed insurance pool to cover future acts.

“The insurance industry and the businesses we insure are facing an immediate crisis, because the Sept. 11 attacks have made terrorism uninsurable,” American Insurance Association President Robert Vagley wrote in a letter to insurance commissioners Oct. 8. “The private insurance mechanism can no longer adequately or accurately price this coverage. Because of this, reinsurance coverage for terrorist acts already has dried up.”

Fortunately, the idea of creating a federal “backstop” is gathering steam on Capitol Hill. Top-level insurance executives and legislators have been in meetings to discuss terms of the legislation, which is aimed at completion by Dec. 31.

With construction of such a pool, the U.S. would join a club of countries, including the U.K., Spain, South Africa and Israel, which have similar systems in place to deal with the threat of terrorism. Basically, the plan calls for U.S. insurers to pool billions of dollars from which they could draw for the reinsurance of future terrorism-risk policies provided to U.S. businesses (excluding acts of war and natural disasters). Should the pool’s resources be exhausted, the federal government would chip in.

The property/casualty insurance industry has already shown its ability and willingness to pay claims from Sept. 11, but future attacks could seriously jeopardize its stability. Some form of government intervention to limit potential future losses is essential at this point.

“The bottom line is we need this legislation and we’re working very hard to make it come through,” said AIA spokeswoman Nicole Mahrt. “All sectors, all types of businesses, small and large, are going to be hugely impacted if this proposal is not put together…[President Bush’s] economic stimulus package will be thwarted if insurance is not available to wrap around investments and spending and all that, so this is crucial for the U.S. economy, because insurance makes business possible.”

The alternatives are bleak: cancellation of coverage, closure of many businesses and economic chaos.

Opposition to the concept is slight as yet. The quibbling will come soon enough in the administration of the pool. Right now, the plan is for a state-chartered program, according to Mahrt. The degree to which the federal government will take a hand remains to be hammered out in the language. Other points of contention will be: are all businesses covered? what about individuals? how is “act of terrorism” defined?

Despite the prolonged ping-pong effect that can sometimes occur in politics, the legislation must be pushed through before Dec. 31. “That’s what everybody’s working on, that’s the goal,” Mahrt said. “It’s that important for the economy.”

Topics USA Legislation