You would think that renewing federal reinsurance protection for terrorism risks in the short term, and establishing a permanent backup facility of some sort for the long-run, would be a no-brainer, given the potential severity and lack of predictability of the exposure involved. But then again, there is so little brain power, guts or political will in Washington these days that it's no surprise Uncle Sam is once again considering leaving the insurance industry in the lurch on this horrific risk.
The entire week was taken up with studies, hearings, press conferences and public statements about whether or not the federal government needs to provide some sort of reinsurance backstop for terrorism risks beyond TRIA’s expiration at the end of next year. I’ve never heard so much debate about what appears to me to be an open-and-shut question. The country needs federal insurance protection in the "war" on terrorism, period!
The word on the street is that the report on terrorism coverage being prepared by the President’s Working Group on Financial Markets—due out Saturday, after Congress goes home to campaign, so no one will hear about it or pay much attention—will somehow conclude that the private market can handle terrorism risks on its own.
If this turns out to be accurate, that would be about as crazy as White House contentions that the war in Iraq is not worsening the risk of another terrorism attack in the first place!
The GAO weighed in this week, but their myopic report seemed to indicate that perhaps federal terrorism reinsurance should be limited to nuclear, biological, chemical and radiological attacks—as if a plane flying into a major commercial building, killing and injuring thousands, is just a routine exposure for private insurers to anticipate and cover.
Washington is clueless about the risk of terrorism. Lawmakers and bureaucrats dilly-dally about securing our ports, nuclear plants, water supplies and transportation hubs. They hand out homeland security grants like political pork, rather than based on sound risk management considerations.
It’s really an outrage how inept our federal government is in dealing with this threat. Congress and the White House make the three monkeys of see no evil, hear no evil, speak no evil infamy seem like the Three Wise Men by comparison!
I have no doubt no matter who says what about terrorism exposures, this debate will go down to the wire again next year, with a lot depending on who is running Congress.
It is incredible to say this, but the best-case scenario for the insurance industry—at least as far as terrorism goes--might be that Democrats take over the Senate and name Hillary Clinton majority leader. At least Hillary recognizes that a lack of terrorism insurance would be a national security concern, as she has repeatedly stated.
All those Republicans who self-righteously insist that the American people can only trust them to defend the country against the terrorist menace, should stop their political posturing and actually do something to defend the economic security of the United States by putting in place a permanent terrorism reinsurance facility.
In future weeks, I’ll address the various proposals that have been floated, but for now I’ll take a straight renewal of TRIA as is, before it’s too late.
What do you think the best way is to insure terrorism risks???
Comments (5)
I am not real happy with the gratuitous swipes regarding the war and cannot understand why you would put the word "war" in quote marks, but I think that you raise an important topic.
I am very involved in this issue as a result of my business, and I can tell you that one of the huge problems is the lack of imagination and cooperation in the underwriting community.
Is there not someone who can get these guys together and come up with a better alternative than TRIA?
And just forget the brokers. They are going to be behind the curve again when some smart guy in the capital markets creates the next ACE or XL to underwrite terrorism.
Yes, we all have a role to play in this matter--Larry Silverstein was not the target on 9-11, America was, so America needs to collectively deal with this problem.
Having said that, the ones directly affected--insurance companies and risk managers--need to come up with some ideas.
Posted by James | September 29, 2006 9:54 AM
Posted on September 29, 2006 09:54
I apologize, James, if you were offended by my verbiage, but I don't believe my comments were gratuitous, as this administration and Congress has a propensity for believing in fairy tales and avoiding the facts.
Any serious examination of the facts involved in the terrorism insurance market would lead any reasonable person to agree that some federal backup role is necessary to cover such a massive and unpredictable exposure.
I also put "war" in quotes not only because we get so flip with the use of the word (such as the "war" on drugs, for example), but also because if taken literally, then terrorism should be excluded altogether by all but workers' comp insurers, since war exclusions are commonly accepted by the government.
If this is truly a "war" on terrorists, then the WTC destruction should not have been covered by policies containing standard acts of war exclusions, right?
In addition, you say that it's time insurers and risk managers used their imagination and came up with some ideas about how to replace TRIA. Actually, there are a number of viable suggestions out there, including establishing a facility such as the U.K. Pool Re concept. Check out NU's coverage at http://cms.nationalunderwriter.com/cms/nupc/Weekly%20Issues/issues/2006/37/News/P37TRIA-HEARING for more details.
Posted by Sam Friedman | September 29, 2006 3:52 PM
Posted on September 29, 2006 15:52
On the one hand, it would seem consistent for Republicans--who want to dismantle government subsidies such as Social Security, and who continuously bash Democrats as favoring "big government"--to support an end to TRIA.
On the other hand, it would seem consistent for Democrats--who support government intervention when the marketplace fails--to support continuation of TRIA.
Having early on recognized the spurious nature of the insurance industry's argument that "terrorism is an uninsurable risk," both factions would no doubt be satisfied if the insurance industry did their job and solved the problem internally.
Indeed, internal solutions may be possible.
Aon's Web site states: "We offer a sophisticated model to help our insurance company clients analyze their terrorism risk exposure. Drawing on our proprietary database of more than 5,300 potential terrorism targets, our model considers 24 attack methods and a variety of frequency assumptions to simulate more than 127,000 terrorism events. Our analysis helps insurers make strategic business decisions about their property, workers' compensation and life insurance portfolios and develop a pricing methodology for terrorism insurance coverage."
This information is supported by an Aon press release, November 2002, in which Bryon Ehrhart, president of Aon Re Services stated: "While credible terrorism risk modeling at this time is deterministic or based upon specific scenarios, and likely will remain so until the potential frequency of severe events can be better estimated, developing a tool that allows us to provide insurers and reinsurers with relative risk indexes by potential target type has been a high priority since late September 2001. Senior managers of insurers, large employers and property owners that utilize our tools are able to consider and manage relative exposures in addition to simply managing aggregates."
In another press release dated March 2003, Aon subsidiary, Aon Re Inc., announced that in conjunction with its catastrophe modeling unit--Impact Forecasting--it has recently completed the first probabilistic catastrophe risk analysis of a combined portfolio of life, accident and property risks for a major insurer."
According to Roger Smith, managing director of Aon Re’s Accident & Health Reinsurance Practice: "The Impact Forecasting model helped our client evaluate the terrorism risk that exists on both sides of the balance sheet."
This information suggests that pricing is not the issue, and that the insurance industry simply needs a creative solution for funding coverage.
Perhaps that solution can be found in the securitization of terrorism risk in the public markets. If Lloyd's can scrape together 16 billion pounds, then the aggregate U.S. insurance industry can surely come up with enough to replace TRIA.
Posted by Edward Kalbaugh | October 1, 2006 11:23 PM
Posted on October 1, 2006 23:23
In my earlier comment on this topic, I suggested the marketplace could find the means to handle this risk.
Catlin Group’s cat bond described below seems to support my contention.
Perhaps this alternative capitalization mechanism could create an interesting topic for insurance industry discussion.
Wouldn’t it be interesting if the public had the opportunity to invest in securities covering terrorism?
***
Hamilton, Bermuda-based Catlin Group Ltd. is issuing a $200.2 million multiperil catastrophe bond that is the industry’s first publicly rated, collateralized debt obligation of natural catastrophe risk, according to New York-based reinsurance intermediary Guy Carpenter & Co., which advised Catlin on the transaction.
The innovative bond, which is the first cat bond rated AA by Standard & Poor’s Corp., could open the cat bond market to new investors, said S&P director Gary Martucci.
The bond’s senior tranche has the AA rating.
The bond’s issuer is Cayman Island-based Bay Haven Ltd., a special purposes vehicle established for the deal, said Mr. Martucci.
The three-year bond, which complements protection Catlin purchases through the traditional reinsurance marketplace, will offer coverage in the event of a series of severe natural catastrophes on an aggregate basis.
S&P said the transaction is structured as a cat swap, with Catlin obtaining collateralized protection if four or more natural catastrophe events occur in the risk period between the closing date and the scheduled maturity date in 2009.
Through the securitization, the note holders will assume the losses for the fourth through ninth events. Catlin will retain the first $100.1 million of losses that would result if there were three triggered risk events.
The bond, which is being brought to market by ABN AMRO London, is also the first catastrophe bond to use Newark, Calif.-based Risk Management Solutions Inc.’s new parametric triggers for non-U.S. losses, according to Guy Carpenter.
Perils covered include: U.S. hurricanes in Florida, the Gulf states and the East Coast; California earthquakes; New Madrid (U.S. Midwest) earthquakes; United Kingdom windstorms; non-U.K. windstorms; and Japanese typhoons and earthquakes.
"It is an innovative capital market structure," said Mr. Martucci. "It meets S&P’s criteria of rating cat bonds in the AA range, yet meets the company’s needs," he said.
It also potentially opens up the class of cat bonds to investors that require AA-rated securities, he said.
Posted by Edward Kalbaugh | November 13, 2006 5:27 PM
Posted on November 13, 2006 17:27
My only concern about the capital markets is whether they have any staying power.
While I have no doubt they can provide badly needed capacity and innovative solutions in a pinch, once the going gets tough, I fear them running for the hills.
I think the capital markets can certainly play a role in filling terrorism reinsurance needs, but the risk is so huge, we still need a federal safety net to keep the industry, and the broader economy, from crashing down.
Posted by Sam Friedman | November 13, 2006 5:31 PM
Posted on November 13, 2006 17:31