WASHINGTON (May 24, 2007) — Private insurers should not be required to offer coverage for terrorism attacks generated by nuclear, biological, chemical and radiological weapons of mass destruction, industry trade groups told congressional leaders today. In a letter to Sen. Chris Dodd, D-Ct., and Rep. Barney Frank, D-Ma., the National Association of Mutual Insurance Companies (NAMIC) and the Property Casualty Insurers Association of America (PCI) said the government should study the NBCR issue.
The congressional leaders are considering extending the Terrorism Risk Insurance Extension Act beyond its Dec. 31 sunset date. While the property/casualty industry strongly supports such proposals, NAMIC and PCI urge Congress to keep NBCR out of the equation at this point. Instead, they suggest Congress enact legislation to establish a commission to study all the risks associated with NBCR attacks and how such events might be financed.
“From an insurance standpoint, NBCR events are qualitatively and quantitatively different from events arising from the use of conventional terrorist weapons,” the letter says. “Indeed, even before the atrocities of September 11 exposed the vulnerability of the United States to large-scale terrorist attacks on American soil, insurance companies and insurance regulators had long regarded losses caused by nuclear incidents as uninsurable.”
The letter points out that in the nearly six years since the Sept. 11 attacks, no private reinsurance has been offered for NBCR coverage and capital markets have not developed any alternative risk transfer products for such events. “That this state of affairs is unlikely to change is reflected in a 2005 RAND report’s observation that NBCR attacks ‘pose a challenge that may be most appropriately covered through a direct government insurance program.’”
Requiring insurers to offer NBCR coverage would likely result in immediate rate hikes for policyholders, the letter explains. “At the outset, insurers would need to quickly raise large amounts of capital to cover an utterly unpredictable risk whose potential loss costs are staggeringly high and variable — somewhere between $27.3 billion and $778.1 billion, according to projections by the American Academy of Actuaries. … Since 9/11, private capital markets have demonstrated no willingness to securitize this type of risk. That leaves rate increases on existing policyholders as the only source of the needed capital. Moreover, since there is no way to predict when the capital will be needed, the only reasonable approach would be to raise all of the required additional capital immediately.”
Small- and medium-sized insurers would undoubtedly face significant challenges from an NBCR requirement, since they would probably have to assume a risk and an operational exposure of great danger and complexity for which they have no previous insuring or claim adjustment experience. Operational issues such as the accuracy of catastrophe loss models for property and liability terrorism risk, regulatory controls on insurer pricing, and issues arising from possible mixed attacks involving both NBCR and non-NBCR exposures have not yet been addressed. The letter calls for careful study and analysis by a commission, rather than a “premature and counterproductive mandate to provide NBCR coverage now.”
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