The Obama administration's 2010 fiscal budget calls for changes in the terrorism risk insurance program that would save an estimated $644 million by shifting additional costs to the insurance industry. While NAMIC shares the administration's goal of reducing the deficit after the immediate financial crisis abates, we submit that making these changes would be like the old saying, "penny-wise, pound-foolish." Or, in today's world, "millions-wise, billions-foolish." Congress first adopted the Terrorism Risk Insurance Act in 2002, in the aftermath of the tragic events of Sept. 11, and subsequently amended and extended the program in 2005 and 2007. Each time, Congress held exhaustive hearings examining developments in the private insurance market and then adjusting the levels of private sector retention of terrorism losses. The goal has been to maximize private sector coverage and minimize the federal government's exposure.
NAMIC believes that Congress has it just about right. We believe that increases in the event trigger, deductibles and copayments, as recommended by the administration, would upset this balance and wind up having the opposite effect--reducing terrorism coverage and raising the government's exposure.
The magnitude of potential terrorist attacks forces insurers to limit their coverages: The American Academy of Actuaries' high estimate for a single terrorist event in New York City is $778 billion, 70 percent greater than the total property/casualty insurance industry surplus for all commercial and personal lines, which are not covered by the terrorism program.
The kind of low-tech attacks that occurred in Madrid and London, if replicated in shopping malls across the U.S. heartland or at chemical plants, could cause enormous economic harm.
The industry has limited capacity to protect against and absorb such losses: Insurers cannot, as the budget proposal suggests, "mitigate terrorism risk through . . . alternative reinsurance options . . . and by building safer buildings." Reinsurance capacity remains limited and expensive and private market alternatives minimal. Safer buildings could reduce losses but one cannot rebuild our existing cities.
The $456 billion figure for industry surplus is misleading. This is not the backstop for just terrorist events but for the entire property/casualty industry, of which terrorism coverage is a tiny fraction.
The proposed changes would drive small and medium-sized insurers out of the business, devastating both them and the program: 75.5 percent of the insurers writing terrorism insurance in 2005 had policyholder surplus of less than the $100 million trigger. A higher event trigger or larger deductible would force many of these companies to withdraw from the market.
Small and medium-sized insurers write almost one-quarter (22 percent) of the terrorism risk lines of business. Their withdrawal from the market would increase the federal government's exposure exponentially.
Lastly, the Congressional Budget Office's projected program costs are highly speculative. "There is no reliable way to predict how much insured damages terrorists might cause in any specific year," so the office's estimates "reflect industry experts' opinions of various outcomes ranging from zero damages up to very large damages"--and so, by definition, are the administration's estimated savings. Put simply, if there are no more large terrorist events on U.S. soil, the cost of the program to the government will be minimal. If there are more large events, the costs could be astronomical.
NAMIC believes that Congress has made as informed a judgment as possible in developing a program to maximize consumer purchases of terrorism insurance and, thus, to reduce the government's direct exposure from a terrorist attack. In addition, limiting the industry's exposure assures that it will have the resources to assist in an orderly and timely recovery. NAMIC thinks Congress got it right and we recommend that it take no action that could jeopardize the balanced, successful terrorism risk insurance program
