A View From The Press Box

I'm as eager as anyone for passage of H.R. 2761—the Terrorism Risk Insurance Revision and Extension Act of 2007--hopefully for the 10 years called for in the bill, regardless of President George W. Bush's short-sighted insistence on a shorter-term renewal (covered in my last blog entry of June 21.)

However, I think it's a huge leap to say that even with TRIA's backup, the insurance industry is prepared to take on the added exposure of an NBCR incident. Before they jump into this with both feet, they should think twice about the massive worst-case scenario they are talking about absorbing here.

On principle, I contend that if we are, indeed, in a War on Terrorism--as President Bush insists--all terrorist attacks should be considered acts of war, and therefore not covered by traditional insurance policies. But if insurers must cover terrorism at all, at least draw the line at a nuclear, biological, chemical or radiological attack! Such intentional assaults by foreign enemies using weapons of mass destruction should simply not be underwritten by private insurers.

Supporters of H.R. 2761 as written should pay close attention to the testimony before Congress last week of Warren Heck, chairman and CEO of Greater New York Mutual Insurance Company, who spoke on behalf of the National Association of Mutual Insurance Companies and the Property Casualty Insurers Association of America--as reported by NU's Dave Postal. He makes a lot of sense, trying to pull insurers and Congress back from the brink before it is too late.

“It is one thing for Congress to require insurers to ‘make available’ terrorism risk insurance for non-NBCR events, where all but the most severe attacks could more likely be handled by insurers within the parameters of TRIA,” Mr. Heck said. “It would be quite another for Congress to impose a new TRIA-type regime for NBCR events.”

Mr. Heck warned that “rolling NBCR into terrorism coverage will likely result in significantly increased premiums and would likely have the unintended consequence of reducing the take-up rate for terrorism insurance.”

Mr. Postal reported Mr. Heck as predicting that because insurers would immediately be required to have capital sufficient to back this new risk—and would face potentially reduced financial strength ratings—“we would also expect to see an immediate diminution of capacity available to provide this coverage.”

“Many small mutual insurers would probably not be able to raise sufficient capital quickly enough to stay in this business,” he added. “The most likely outcome would be reduced—not expanded—capacity for all lines of insurance, as insurers divert capital from other products to support this new risk they’d be required to bear.”

In addition, under his forecast, “creating new, stand-alone NBCR coverage would lead to adverse selection, in that only the most vulnerable risks would opt for coverage.”

Mr. Heck advised Congress to establish a federal commission to study NBCR coverage issues before taking such a huge step. “We understand and believe that this is a grave national issue that must be addressed, but we do not believe it can be resolved simply by adding a mandate that insurers provide such coverage to this legislation,” he concluded.

Bob Hartwig, president of the Insurance Information Institute and one of the truly original thinkers in this industry, also expressed grave doubts about including NBCR risks in a TRIA extension bill, but stopped short of declaring it a deal breaker--preferring to simply put the exposure into context, which in itself is pretty scary.

“NBCR risks pose a unique threat which historically has not been covered by standard property-casualty insurance policies," he said. "Insurers have little-to-no-experience insuring against these risks--the magnitude of which can easily exceed the claims-paying resources of private insurers, even with [a TRIA backup] in place.”

He went on to warn ominously that “the successful detonation of a nuclear device in Manhattan, for example, could result in losses in excess of $750 billion. A loss of this magnitude is nearly five times the claims-paying capacity of all property-casualty insurers for [TRIA] eligible lines of coverage.”

Did you catch that? Five-times the industry's claims-paying ability! Over $750 BILLION in potential losses. As bad as the World Trade Center loss was (about $36 billion of insured losses in 2006-valued dollars), it would easily be dwarfed by an NBCR event in a major city.

While the House bill tries to take some steps to ease the potential burden on smaller insurers, it doesn't go nearly far enough to compensate for the potentially monumental exposure the industry would be asked to assume.

Attacks with weapons of mass destruction should be covered by the federal government, period--with perhaps private insurers used as an administrative mechanism to pool such risks.

I know, I know--the experience we've had with the National Flood Insurance Program doesn't bode well for repeating this system with NBCR attacks. But does that mean the alternative should be to dump a huge portion of such exposures on the private market? I don't believe so.

What do you make of all this???