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Insurers won't cover worst terror risks: GAO


WASHINGTON--Proponents of a federal terrorism insurance backstop believe their cause will receive a needed boost courtesy of a federal report that holds that any market-driven expansion of coverage for chemical, nuclear, biological and radiological risks is "highly unlikely."

The Government Accountability Office's Sept. 26 report--"Measuring and Predicting Losses from Unconventional Weapons is Difficult, but Some Industry Exposure Exists"--came only days before a presidential working group was slated to issue a congressionally mandated review of the terrorism insurance marketplace. The working group's report was mandated by the Terrorism Risk Insurance Extension Act of 2005. That act, extended through the end of next year, is a scaled-back version of the federal backstop created in 2002.

The working group's report is scheduled to be released Sept. 30, although it may be delayed.

The GAO report does not make any recommendations for dealing with such risks. The report says insuring such risks is "distinctly different from insuring other risks because of the potential for catastrophic losses, a lack of understanding or knowledge about the long-term consequences and a lack of historical experience with (such) attacks in the United States."

It adds, however, that although such risks "may not fully satisfy the principles of insurability," some insurers may refuse to offer coverage while others "may choose to offer coverage for some or all of the risks." The report points out, for example, that state laws require insurers to cover the peril in workers compensation policies.

"Representatives of workers compensation, life and health insurers expressed concerns that the prices they currently charge may not cover their potential exposures to (CNBR) risks, sometimes because of regulatory limitations, and generally because of difficulties in measuring and pricing for (CNBR) losses. Given the challenges faced by insurers in providing coverage for and pricing (CNBR) risks, any purely market-driven expansion of coverage is highly unlikely in the foreseeable future," said the report.

Report welcomed

The GAO report drew plaudits from risk managers, underwriters and producers alike for having acknowledged what they had said all along--that the CNBR risk cannot be tackled by the private market.

The Risk & Insurance Management Society Inc. "is pleased to finally see an admission from the federal government that there is an exposure related to a terrorist attack that the private sector cannot address by itself," said Terry Fleming, a member of New York-based RIMS' board of directors with responsibility for external affairs.

But "we are disappointed that the GAO report did not take the next step and recommend possible solutions, as most buyers, brokers and insureds have been asking for years," added Mr. Fleming, who is also director-division of risk management for Montgomery County, Md., in Rockville.

"The CNBR exposure represents a huge gap in protection, especially for employers and insurers who must provide workers compensation benefits, group health benefits and life insurance benefits without adequate premium or excess insurance coverage. We are hopeful that the report from the president's working group will ratify these findings and include recommendations for the mitigation of the exposure to include all types of terrorist attacks," he said.

"The GAO report is the first realistic study that we've seen to date," said Brad Wood, senior vp-risk management for Bethesda, Md.-based Marriott International Inc. "It confirms what risk managers have known for some time--that there is no CNBR insurance in the marketplace except where mandated by worker compensation."

He noted the report listed four principles that underlie an insurer's willingness to underwrite a particular risk. These include: The law of large numbers must apply, the loss must be definite and measurable, the loss must be fortuitous or accidental, and the loss must not be catastrophic.

"These same four criteria can easily be applied to conventional terrorism risk and underscore the need for a long-term public/private partnership," Marriott's Mr. Wood said.

Looking ahead

"I think it will help frame the debate on how Congress will look at terrorism next year," said Joel Wood, senior vp-government affairs for the Council of Insurance Agents & Brokers in Washington. "Whatever emerges, if anything, it will look and be different than the existing program. My guess is that there will be more focus on CNBR risk."

"That GAO report was very strong. Notwithstanding anything the working group might say, it's been a good week," he said.

Underwriters stress that the GAO report confirms their belief that the private market cannot deal with the CNBR exposure.

"It would seem that it's a very positive contribution to the question of whether or not a federal role is necessary," said Frank Nutter, president of the Reinsurance Assn. of America in Washington. "The market has made efforts to provide capacity and the GAO has found, as we knew, that it's so limited that government participation with CNBR remains critical."

"It confirms the reality--it really just reflects reality, which is that there really is no appetite in the private-sector capital markets, and I include the private reinsurance markets, for CNBR risks," said Julie Rochman, senior vp at the Washington-based American Insurance Assn. "There is no appetite now and there would be no increased appetite if the government backstop goes away.

"It was a good study, it was complete and it was fact-based. It clearly laid out why the government has to assume financial responsibility for war-like attacks," she said.

The full report is available at