Terrorism Views Aired

By Daniel Hays

An initial outline of how the Terrorism Risk Insurance Programwill be administered, differing views on terrorist attackpredictability and analysis of the new terrorist threat were airedlast week at an industry conference in Florida.

The topics were explored by four speakers at the annualsymposium of the National Council on Compensation Insurance inOrlando, Fla.

Jeffrey S. Bragg, executive director of the U.S. Terrorism RiskInsurance Program told his audience, at the moment, TRIP “consistsof me.”

TRIP, which is part of the U.S.
Treasury Department, was created after Congress passed theTerrorism Risk Insurance Act. The measure created a reinsurancebackstop program designed to cover losses from a foreign terroristact that, in the first year of the program, exceed 7 percent of thedirect earned premium of insurers when any loss event of $5 millionor more occurs.

The TRIA is due to expire in 2005 and Mr. Bragg said he did notknow if it would be continued. Mr. Bragg, the former administratorof the Federal Insurance Administration during 1981-1986, told hisaudience that he had presided over the termination of the FederalRiot Reinsurance Program and Federal Crime Insurance Program.

But he pointed out that ending the riot and crime coveragesystem was fairly unique and that the demise of such governmentprograms is a rare event.

The TRIP director said that he envisions starting a lightlystaffed virtual insurance company and once TRIP is fullyoperational, “were going to duplicate the reinsurance process youalready know” for handling claims, he said.

He said his plans for the future include recruiting and hiringstaff, implementing claims and audit enforcement procedures, aswell as developing a framework for policy surcharge and recoupementprocedures and final rules.

In addition, Mr. Bragg said he is working on an emergency planto cover any terrorist events that occur in the short term.

Terrorist attacks are something that we can expect to face asthe major challenge of the 21st Century, political violenceauthority Brian Jenkins told the NCCI group. Mr. Jenkins, who is asenior advisor for RAND Corporation, the Santa Monica, Calif.-basedresearch organization, said terrorist activities throughout theworld, in the past, had some restraints. But as religious fanaticsbecame involved, their operations moved into “indiscriminatelarge-scale violence.”

The al-Qaeda, he said, are unique in having a largeinternational reservoir of members that includes “people withbrains” willing to kill themselves. They continue to pose “asignificant threat” to the United States, he said.

In Mr. Jenkins view, “We can never get controls tight enough” toprevent the activities of terrorists who need only $200,000 tocarry out operations that have the scope of the Sept. 11attacks.

“This is a world of continuing large-scale terrorist attacks,”Mr. Jenkins advised. “We are moving into a completely new world”where terrorists are exploring nuclear, biological and economicattacks, and “the worst-case scenario is now a presumption,” headded.

Estimating what losses could result from a terrorist attack canbe done “with certain limitations,” said Richard Clinton thepresident of EQECAT Inc. of Oakland, Calif., a terrorismunderwriting modeling firm that is a division of ABS Consulting.Mr. Clinton said his firm talked with the FBI and other experts onterrorism to come up with a consensus for its model that foreseesone terrorist event each year in the United States.

In preparing the model, which is used to assess the threat levelfor an insurers portfolio, EQECAT looks at potential targets in alocality such as military bases, government buildings and tallbuildings.

Mr. Clinton advised that even in the heartland of America, thereare targets. And “any city has an exposure–some more thanothers.”

It is “impossible to model every type of attack,” he said. Butwhile the modeling is imperfect, “it is a process that does give usthe ability to quantify,” he said.

Richard L. Thomas, chief underwriting officer for AmericanInternational Groups Domestic Brokerage Group, said “terrorism isinsurable, but only to a point.” A nuclear blast, he said, is notinsurable and would exceed the capacity of the property-casualtyinsurance industry.

Mr. Thomas said he did not believe it was possible to make aprediction when the next terrorist attack on the United Stateswould occur or how many attacks there might be.

The AIG executive said that the insurance industry needs tounderstand the scope of terrorism and “do the math so we know theterms or conditions under which we can respond.

Assessing the TRIA, Mr. Thomas said that it provided somefinancial parameters on the exposure to risk of loss. The program,he said, would protect the industry against insolvency, but mightnot be enough to protect individual companies from that fate.

Because reinsurers derive no benefit from TRIA, “a tremendousamount” of coverage they normally would provide has been lost toprimary insurers, he said.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, May 26, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.