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U.S. Grapples With Lack of Insurance Against WMD By Joe Fiorill WASHINGTON — As U.S. lawmakers weigh renewal of a soon-to-expire government “backstop” for companies that sell terrorism insurance, policyholders and insurance companies alike are focusing on the program’s failure to spark significant WMD coverage (see GSN, June 21). President George W. Bush’s administration, policy groups and industry players diverge over the wisdom of renewing the government reinsurance mechanism. The program is described in the 2002 law that created it as a “temporary” post-9/11 measure intended to ensure the availability of terrorism insurance and to “allow for a transitional period for the private markets to stabilize, resume pricing of such insurance and build capacity to absorb any future losses.” Under the current program, the federal government promises to shoulder up to $100 billion of the insurance industry’s payouts following major terrorist attacks. With this limited guarantee in place, the law requires insurers to cover terrorist damages, but the program leaves open the question of who would be responsible for losses exceeding the $100 billion cap. The Treasury Department issued a report June 30 indicating the Terrorism Risk Insurance Act had served its purpose and could be allowed to expire in December. Major policyholders’ and insurers’ groups have disputed that view, arguing for a continuation of government support. House of Representatives Financial Services Committee staff members are expected to work during the current congressional recess on a bill to renew the program, which the committee would begin considering soon after Congress returns Sept. 6. Despite disagreement over whether the program should continue, most participants in the debate agree that the act has not resulted in enough insurance policies against the potentially massive costs of a nuclear, biological, chemical or radiological attack. Major policyholders are represented in the debate by the Coalition to Insure Against Terrorism, which counts members as varied as the Chemical Producers and Distributors Association, the Hilton Hotel Corp. and the National Football League. The group maintains that WMD coverage policyholders can buy does not come close to their potential losses in a large-scale WMD event. Coverage is often capped at $50 million, according to group spokesman Martin DePoy. “What we’re hearing is that it’s virtually impossible to acquire meaningful insurance against that sort of loss,” he said this week. “It’s been capped at such low amounts, it’s not really meaningful,” said DePoy, who is a vice president of the National Association of Real Estate Investment Trusts. Insurers have meanwhile cited the lack of WMD coverage as evidence of the continued need for a program of government support they are eager to see extended. The lack of WMD insurance policies, they say, illustrates that the industry is not yet strong enough after Sept. 11 to forgo the government’s financial backing of terrorism insurance policies. “The lack of NBCR coverage even while the backstop is in place is powerful evidence that the private markets are not yet fully capable of handling the terrorism risk exposure without some backstop,” Independent Insurance Agents and Brokers of America President-elect William Stiglitz said last week at a hearing of the House Financial Services Capital Markets, Insurance and Government-Sponsored Enterprises Subcommittee. Complicating the debate is persistent confusion in some quarters about whether WMD scenarios are even covered under the 2002 law. Government and industry sources acknowledged there have been widespread misperceptions about whether the law covers WMD insurance. Consumer Federation of America Director Robert Hunter, for example, said at last week’s hearing that the current act “does not cover terrorist attacks involving most weapons of mass destruction.” However, according to the June 30 Treasury report, “TRIA’s definition of insured loss under the program does not exclude NBCR losses under a commercial property and casualty insurance policy, nor does the TRIA definition of an act of terrorism exclude these risks. If an insurer included coverage for these risks in a commercial property and casualty insurance policy and otherwise meets program conditions for payment, the insurer would receive federal payment for such losses.” Although the law requires insurers to provide coverage in terrorism events for any losses that they would cover in such nonterrorist scenarios as natural disasters, it has not been interpreted as requiring them to treat WMD terrorism the same as conventional terrorism. Insurers may omit WMD coverage from terrorism policies, according to the Treasury report, “if such policy exclusion is also applied to losses arising from events other than acts of terrorism.” Such exclusions are “common,” according to a June 20 RAND report on terrorism insurance. In 2003 and 2004, according to Treasury, about 35 percent of insurers reported including WMD coverage in some Terrorism Risk Insurance Act-eligible policies, and the percentage was increasingly composed of the largest insurance companies. At the same time, however, less than 3 percent of policyholders reported having WMD coverage. That figure “contrasts with the results from the insurer survey,” Treasury said. The “dominant reason” cited for not buying such coverage was “that policyholders believed that they were not at risk.” RAND, which found in its report that continuing government measures are needed to spur terrorism insurance availability, highlighted the particular risks represented by the dearth of coverage against weapons of mass destruction. “The possibility of a radiological attack in the United States exposes perhaps the greatest weakness of the terrorism insurance market,” the policy institute said. “The overall economic ramifications of a successful dirty bomb attack occurring on American soil would be enormous, irrespective of the number of people actually killed.” As a result, according to the report, “There is good reason for insurers, who generally seek to avoid open-ended liability, to wish to exclude radiological attacks.” Lawmakers will be faced next month with a decision about whether and how to tailor any extension of the program to encourage a greater prevalence of WMD policies. “A strong incentive is needed,” Pritzker Realty Group President Penny Pritzker said at the House subcommittee hearing last week. Center for American Progress national-security expert Andrew Grotto, who like RAND has expressed particular concern over the radiological threat, said one approach could be to require, rather than just allow, insurers to cover WMD under the government backstop program. “You would condition receipt [of government reinsurance payments] by the insurance company on whether or not they offered coverage to a radiological instance,” Grotto said this week. RAND suggested in its report that Washington could offer subsidies to buyers of insurance to counteract high prices for WMD coverage or could reduce the deductibles paid by insurers under the government program in hopes of increasing their willingness to accept more risk exposure. Despite citing the WMD-coverage gap as evidence they need more support, insurance industry representatives have kept mostly mum about how the program’s extension should address the lack of WMD coverage. The Coalition to Insure Against Terrorism has expressed skepticism that insurers would support any expansion of the risks they run. As a result, coalition spokesman DePoy said, “I’d have a hard time believing that they would drastically alter this program to include any kind of a facilitation of a product for weapons of mass destruction.” Grotto agreed, “I don’t think that the insurance industry would support including [new] things, because it just raises their exposure.” In such a climate, RAND indicated that the best solution might be to bypass insurers altogether by offering government-supplied WMD coverage directly to policyholders. “Extension to cover CBRN attacks poses significant challenges for insurance and may be appropriately covered through a direct government program,” the institute said.
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