Terrorism Insurance … We Can’t Risk Sitting On the Sidelines

Some have viewed this law as a bailout of a failed insurance industry; we believe just the opposite is true.

When Congress passed the Terrorism Risk Insurance Act (TRIA) in 2002, some heralded the act as a panacea for providing terrorism coverage. Others criticized it as a dismal attempt at dealing with the terrorism exposure capacity problem. The Independent Insurance Agents & Brokers of New York participated actively with the New York Insurance Department in establishing the rules under which the department implemented the act in our state. Now, less than 14 months after the law took effect, we’re already starting to hear calls from bureaucrats in the U.S. Treasury Department and members of Congress that the act not be renewed when it expires at the end of 2005.

At a recent meeting sponsored by A.M. Best, panelists were of the opinion that the law’s renewal is unlikely. Many others have expressed the same opinion. Unfortunately, the vast majority of insureds have not added the coverage, which demonstrates one of the weaknesses of the current act. However, we still hope that the continuance of this landmark law is seriously debated and the approach is improved. In any case, something should definitely be kept in place.

As we talk to agents throughout New York and across the country, it’s become clear that while TRIA has not solved all the problems and new problems have arisen in some cases, it has stabilized the availability of terrorism insurance, if not the cost. Anecdotally, we find that most consumers are choosing not to take advantage of the terrorism coverage (most estimates are less than 15 percent secure coverage). However, in those metropolitan and high-risk areas where coverage is absolutely critical, consumers are purchasing it, sometimes at extremely high costs.

Some have viewed this law as a bailout of a failed insurance industry; we believe just the opposite is true. The insurance industry stood tall after 9/11 and, as far as we can tell, has paid all the legitimate claims flowing from the terrorism attack. Yet, despite sustaining a record $40 billion in losses from that event alone (according to the Insurance Information Institute), the industry has remained a viable underpinning for the business activity of the country.

The public and policymakers seem to have a very short memory on the terrorism issue. While memory does not enter the picture when speaking of insurance, predictability does. Insurers simply cannot put their entire companies at risk to provide terrorism coverage when they cannot predict the outcome. That is why some form of government mechanism (an improved TRIA, catastrophe reserves, etc.) is necessary. We all know should there not be a federal approach and God forbid another incident occurs, the government will cover losses in some way. Our country simply could not withstand the economic chaos that would occur if a loss similar to the Sept. 11 event occurred without claims coverage.

Rather than draw up a preplanned approach, we would find ourselves with a government bailout of commercial and personal losses without having any mechanism for spreading that cost out over the universe of insureds. So, it would slip to the general treasury of the U.S. … and most likely critics would blame the insurance industry for not doing its job properly. Worse yet, given the propensity of the highly active plaintiff’s bar, energetic but misguided judges around the country may find that terrorism exclusions do not apply (remember the absolute pollution exclusion?), forcing the industry to pay without collecting any premium.

Right now, a trial is underway to determine if the attack on the World Trade Center was one or two events. A lot is riding on the outcome ($35 billion). Ironically, this would be a moot issue if we don’t have a terrorism mechanism in place, as there would be no coverage for terrorism insurance.

For some, our commentary on the TRIA may seem to be premature, as the act does not expire until Dec. 31, 2005. However, late this year, insurers will begin to tender policy renewals that cover time periods after that date. If the expiring policies contain terrorism insurance, you can bet that this uncertainty is going to create significant availability problems. Lack of terrorism insurance would delay or halt construction projects and cause some businesses and institutions to curtail or cease operations.

Some have opined, unfortunately, it will take another major act of terrorism to create the impetus for renewal of this act. We can only hope that we do not suffer any additional terrorist attacks. We can also hope that our nation’s leaders have the foresight to reauthorize this law with changes necessary to continue insurers’ capacity to write terrorism insurance.

Richard A. Poppa has served as the chief staff executive for the Independent Insurance Agents & Brokers of New York since 1996. During his 25-year insurance trade association career, he was senior VP of the Independent Insurance Agents & Brokers of America for seven years.

Topics Catastrophe Natural Disasters New York Agencies Market