Last fall, two reports from the United States Government Accountability Office (“GAD”) addressed the status of property insurance coverage for terrorism and nuclear, biological, chemical or radiological weapons attacks (“NPCR”). In its September 2008 Report, the GAO related that the terrorist attacks of September 11, 2001, resulted in estimated insured losses amounting to $32.5 billion dollars. U.S. Government Accountability Office, GAO-08-1057, Status of Efforts by Policyholders to Obtain Coverage, at 1. Subsequent to the attacks, “insurers largely stopped offering terrorism insurance coverage to commercial property owners, which raised significant concerns about potential negative economic consequences.” Id. In response, Congress enacted the Terrorism Risk Insurance Act of 2002 (“TRIA”), which requires insurers “to offer terrorism insurance to their commercial clients on the same terms they offer other types of insurance, and, in the event of a future terrorist attack, are responsible for paying a deductible of 20 percent of their direct earned premiums from the previous year to cover related losses.” Id. 1-2. “The federal government is responsible for covering 85 percent of the insured losses up to a maximum of $100 billion on an annual basis after insurance companies paid the deductible.” Id. 2. TRIA was reauthorized in 2005 and again in 2007. The 2007 reauthorization extended the program until 2014.
In its September 2008 Report, the GAO reported that “commercial property terrorism insurance currently appears to be widely available on a nationwide basis at rates viewed as reasonable, largely due to the TRIA program and the current ‘soft’ insurance market.” Id. at 9. Nonetheless, the GAO reported that some insurers would reduce by as much as 95 percent their amount of terrorism coverage in the absence of the TRIA. Id. 11. What is more, insurers “caution that another terrorist attack were ‘hardening’ of the general terrorism insurance market could reduce the current supply of terrorism insurance coverage and increase pricing.” Id. at 11. The GAO cautioned that one industry analyst remarked that “even a modest terrorist attack in the future can cause significant fear and concern in the market and lead to increases in prices and restrictions on availability.” Id. at 12. What is more, terrorism insurance premiums in New York City “can be twice as high as prices for similar buildings in other cities.” Id at 13.
Despite the TRIA, there remains questions about the availability of terrorism insurance coverage. Several insurance companies informed the GAO that “they remain significantly concerned that a future terrorist attack would result in substantial losses.” Id. at 17. In that event, large insurers would “face TRIA deductibles that would result in billions of dollars” of losses. Id. Finally, the GAO reported that the insurance for terrorism risk “continues to be expensive and available in limited amounts.” Id. at 20. This is because rating agencies require significant capital to support terrorism risk. Id. at 21-22.
A recent article in The Weekly Standard proposes a unique, private sector solution to the problem. Eli Lehrer observes that “under the TRIA the federal government has assumed nearly unlimited liability for major terrorism losses.” Eli Lehrer, An Alternative to Unlimited Liability for Taxpayers, The Weekly Standard, August 10, 2009. He notes that insurers cannot manage terrorism risk because actuaries “can’t make decent guesses about the likelihood of terrorist attacks” because the “best information about terrorist attacks . . . remains a closely guarded secret within the intelligence and law enforcement communities.” Id. Therefore, standard insurance arrangements are not the answer to the problem.
Lehrer relates that Clive Tobin, a reinsurance executive, has proposed “a ‘true reciprocal’ system, wherein a group of owners of similarly valued buildings in a city ‘would each take responsibility for paying’ a certain amount in the event that ‘terrorists destroyed any group member’s building.” Id. “The firms would pay no yearly premium in return for the coverage . . . and would not be regulated as insurers.” Id. Rather, the members of the group “would simply pledge their full faith and credit to pay the claim of another group member who experienced an attack.” Id. As a “secondary backstop” the government could provide partial coverage against this specific company’s default on its reciprocal obligations.” Id (the need for some form of government guarantee is evidenced by the GAO’s December 2008 Report, which addresses the difficulty of insuring against NBCR attacks). Lehrer notes that the principal obstacle to such a system is the current legal and regulatory framework, which would require each party participating in the reciprocal system to submit to state regulation as an insurance company. Id. Acknowledging that the “idea needs further refinement, he suggests that the government pursue a pilot program alongside TRIA.” Id.
