Hours after the terrorist attacks of Sept. 11, 2001, insurance companies, realizing their enormous exposure to loss from the disaster (ultimately, close to $40 billion), filed for terrorism risk exclusions in property insurance policies. Within weeks, more than 40 state insurance departments had agreed.
Suddenly, companies across the U.S., from high-profile targets in New York to midsize lumberyards in Indiana, either could not obtain terrorism insurance or could not afford the new stand-alone policies that quickly materialized in the wake of the attack. More than a year later, the federal government finally came to the rescue with the Terrorism Risk Insurance Act (TRIA) as a "temporary Federal program that provides for a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism."
Under TRIA, the U.S. government assumes 90% of losses caused by foreign terrorist attacks, up to $100 billion a year, above specified deductibles paid by insurers. But insurers are required to make terrorism coverage available, and a recent survey by insurance broker Marsh Inc. shows nearly 50% of companies accepting the coverage, almost double the number the year before.
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The only problem: The government backstop will disappear at the end of next year–even though Al-Qaeda is still very much in business. The end of TRIA will mean the end of the current affordable coverage being offered as part of property policies. Legislation has been proposed to extend TRIA through 2007. But there is no reason to conclude that a private sector alternative will be any more ready then than it is now.
If it were up to the insurance industry, TRIA would be a permanent addition to government obligations. The argument is simple: There is not enough capacity to cover what could amount to trillions of dollars in losses in the case of a catastrophic assault. It also represents free reinsurance, so it would be hard to construct a scenario in which insurers would decline TRIA–that is, unless the government decided to start charging.
Many in Corporate America also back proposals to extend TRIA. "I'm a staunch free market believer," explains Janice Chamberlain, senior director of risk management at Costco Wholesale Inc., the Issaquah, Wash.-based chain of superstores, "but the government must step in when the level of uncertainty is so high that insurers–who are in the business of risk–balk."
Consumer advocates are less convinced. Groups like the Consumer Federation of America argue that insurers, who have seen sizable growth in profits and reserves, are better positioned today than in 2001 to absorb the costs of terrorism. Back then, stiff competition had driven premiums and profits down considerably.
But companies struggling to develop informed risk management strategies cannot live with the uncertainty created by a TRIA in limbo. That means, at the very least, the government must decide TRIA's fate soon.
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