Lack Of Terrorism Cover Lamented

"The implication of these insurance market conditions and economic consequences makes it critical for Congress to enact a federal terrorism risk insurance backstop," Deputy Assistant Treasury Secretary Mark J. Warshawsky told the panel.

"Even if, as we all fervently hope, another terrorist attack does not occur, there are indications that the lack of adequate terrorism insurance is beginning to affect firms in some sectors of the national economy," said Richard J. Hillman, director of financial markets and community investment for the GAO.

He added that, "The ultimate scope of these effects is uncertain at this time, but they could become potentially significant in an economy recovering from a recession."

The GAO issued a formal report on the coverage situation which found "large companies, businesses of any size perceived to be in or near a target location, or those with some concentration of personnel or facilities are unlikely to be able to obtain a meaningful level of terrorism coverage at an economically viable price."

In earlier testimony before the committee, Federal Reserve Board Chairman Alan Greenspan also cited the lack of terrorism coverage as having possible economic consequences.

Responding to a question, Mr. Greenspan said insurance is a crucial aspect of a fairly large segment of the economy. However, he said, it is impossible for insurance to determine the risk for terrorism.

"The problem is really the types of real estate activity being held up, whether delays in construction and building and that sort of thing are having a significant impact on the economy," Mr. Greenspan was quoted as saying. "I'm one who thinks we ought to be looking at this issue."

Rep. Sue Kelly, R-N.Y., who chaired the terrorism insurance hearing, said the responsibility lies with the U.S. Senate to act on this issue. The House, she noted, acted quickly last year and passed H.R. 3210, which would establish a federal government loan program to help insurers pay losses arising from another terrorist event.

Unfortunately, Rep. Kelly said, the issue has gotten "stuck" in the Senate. "In short, the Senate leadership's failure to act on terrorism insurance legislation is imposing a 'fear tax' on America, costing real jobs when the country is trying to pull out of a recession," Rep. Kelly said. "I sincerely hope that the Senate leadership will act quickly to avoid a potential calamity."

Committee Chairman Mike Oxley, R-Ohio, added that the legislative imperative is still very real and continues to grow day by day. "While the sky is not falling, it is certainly cracking around the edges," he said.

However, several industry lobbyists told National Underwriter that they have been informed by the Senate leadership that they will not take up the terrorism insurance issue until after the spring recess, which is scheduled to run from March 25 through April 5.

In his testimony, Mr. Warshawsky of the Treasury Department said that the insurance industry had taken a double hit from the Sept. 11 terrorist attack.

First, he said, insured losses are estimated to be about $40 billion, the largest in history. Moreover, Mr. Warshawsky added, the drop in the stock market following Sept. 11 caused investment losses for insurance companies. He called this a "difficult and risky situation" for insurers and reinsurers that raises the possibility of an insurance company failure.

Mr. Hillman said that since the Sept. 11 attacks, the "key dynamic" taking place in the insurance industry has been a shifting of the risk for terrorism-related losses from reinsurers to primary insurers, and then to the insured. Because insurers have been withdrawing from the market gradually, the extent of potential economic consequences is still unclear, he said.

"What is clear," the GAO official said, "is that in the absence of terrorism insurance, another terrorist attack would dramatically increase direct losses to businesses, employees, lenders and other non-insurance entities beyond those resulting from Sept. 11."

Mr. Hillman added, "should the government decide to intervene after a future attack, it would do so without the readily available claims-processing and payment mechanisms that exist in the insurance industry."

However, Mr. Hillman said a decision by Congress to enact legislation would also have consequences. Specifically, he said, it could be difficult to implement quickly and might be extremely expensive.

David L. Mair, director of risk management for the Colorado Springs-based U.S. Olympic Committee, said that he is confident that the reinsurance markets will return eventually.

"But until that time, we are taking an increasingly risky gamble with the financial foundation of American businesses," said Mr. Mair, who is also president of the New York-based Risk and Insurance Management Society. "We are holding our collective breath that nothing else will happen. But if something else does happen, U.S. companies, and by extension their employees, will bear the consequences."

Mr. Mair stressed that RIMS members are consumers of insurance. This is not an issue of bailing out the insurance industry, he said, contending that the issue is protecting and preserving the American economy in the event of another major terrorist attack.

Deborah B. Beck, executive vice president of the Real Estate Board of New York, cited a variety of specific examples in which the lack of terrorism insurance has had real world economic consequences. In one case, she said, a firm with a real estate portfolio in excess of 25 million square feet in several major cities was unable to get terrorism coverage. Prior to Sept. 11, she noted, the company had a blanket policy with $1 billion in coverage.

However, Ms. Beck said, the carrier would not renew the policy, and the company was not able to replace it. The only bid it received for stand-alone terrorism coverage quoted $25 million of coverage for a $1 million fee, she said.

When the company offered to take Manhattan properties out of the package to obtain terrorism coverage for the rest, she said, it was rebuffed. "Now, the owners are technically in default on their loan financing," Ms. Beck said.

But J. Robert Hunter, director of insurance for the Washington-based Consumer Federation of America, said that while there are some problems in the market, CFA has found no broad economic problems caused by the terrorism insurance situation. Moreover, he said, the problems that do exist in the market are being resolved.

"We urge Congress to go slow and allow these private sector alternatives to develop," Mr. Hunter said. Congress, he added could always act, and act quickly, after an event, as it did in voting to provide terrorism insurance for airlines.