Terror Price Battles Begin; D.C. Regulator Questions Data
Washington
The lack of solid historical data on terrorism risks could lead to disputes between insurance companies and insurance regulators.
In the District of Columbia, Commissioner Larry Mirel blasted data recently developed by Jersey City, N.J.-based Insurance Services Office as "highly speculative." According to the ISO data, businesses located in the District of Columbia were deemed 100 percent more likely to be targeted for a terrorist attack than their counterparts just across the borders in Maryland and Virginia.
"These assumptions are just off-the-wall," Mr. Mirel told National Underwriter.
If implemented, he said, the price for insurance in D.C. could be two-to-three times that in Maryland and Virginia.
"Why would anyone stay in D.C.?" Mr. Mirel asked.
Dave Dasgupta, a representative of ISO, emphasized that there is no current dispute between ISO and D.C. ISO, he noted, has not yet filed rates.
Rather, Mr. Dasgupta said, ISO has had informal discussions with regulators and is trying to understand their concerns.
It is, he said, a very complex issue.
"We dont have a lot of historical data on terrorism risk," Mr. Dasgupta said.
He added that ISO is under tremendous time pressure to develop terrorism insurance rates. Under the recently enacted Terrorism Risk Insurance Act, which creates a federal reinsurance backstop for losses caused by acts of international terrorism, insurance companies must offer terrorism coverage to all commercial policyholders by Feb. 24.
"We are trying to work as quickly as possible to make a filing," Mr. Dasgupta said.
The dispute appears to be based on a loss estimation model developed by AIR Worldwide Corp., ISOs Boston-based subsidiary.
AIR employed a team of counterterrorism experts with experience working at the FBI, the CIA and the Defense Department.
AIR compiled a database of landmarks to represent the range of possible targets, according to an AIR press release.
The list includes high profile "trophy" properties that have a greater-than-average risk of being attacked due to their symbolic value, AIR said.
The model, AIR said, allows for identification of concentrations of exposures.
But Mr. Mirel said that he believes ISOs methodology is severely flawed. The methodology focuses on territorial rating, which Mr. Mirel said he believes is ill suited for terrorism.
Based on a three-tiered approach, he noted, D.C. is deemed to be a first-tier jurisdiction, facing the highest risk of a terrorist attack, while Maryland and Virginia are deemed third-tier jurisdictions, facing the least risk.
But in reality, Mr. Mirel noted, one of the actual Sept. 11 terrorist attacks occurred in Virginia, the site of the Pentagon.
"To say that D.C. has a 100 percent greater possibility of being struck than Northern Virginia is bizarre in the extreme," Mr. Mirel said.
Moreover, Mr. Mirel noted, among the facilities frequently cited prime targets for terrorist attacks are nuclear plants and biological labs. D.C., he said, has none of these.
He said that he believes ISO singled out D.C. because thats what its experts told it.
But a lot depends on the type of attack, Mr. Mirel said. The fallout from certain attacks, he said, will not stop at the D.C. border.
He added that he challenged ISO representatives with the example of two upscale department stores, one of which is in D.C. and the other is just across the street in Maryland.
Under the ISO model, Mr. Mirel said, the D.C. store would pay significantly more for insurance than the store just across the street. ISO, he said, had difficulty justifying the difference.
Mr. Mirel said he believes that ISOs risk assessment is very speculative and cant be defended. Rather than thinking territorially, he said, ISO should look to spread the risk more thoroughly.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 13, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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