Study: Terror Insurance Act Too Vague

Conning yesterday released a report "Terrorism Risk Insurance Act of 2002: Problem Not Solved," which found the legislation difficult to implement and administer.

Under the Act, foreign terrorism is covered and domestic terrorism is excluded. The Secretary of the Treasury, the Secretary of State and the Attorney General would have to rule that a destructive act qualifies as terrorism.

Mr. Thomas said the regulatory flexibility contained in the Act "represents both a benefit and an uncertainty to the insurance industry."

"Political factors could determine the coverage definition," Mr. Thomas said. As an example, he cited the Oklahoma City bombing, where authorities quickly ruled out a Middle Eastern connection. Subsequently, he said, investigators determined that the bombers had made calls to Philippine terrorists who had ties to al Qaeda.

"At what point do you make the determination foreign or domestic terrorism?" Mr. Thomas asked. "We need something that wont be interpreted in different ways," he advised.

Mr. Thomas said companies that seek terrorism coverage must face this question and decide if they would be willing to have a domestic terrorism exclusion."

Domestically, he noted, that questions could arise in a case involving the bombing of an abortion clinic. Depending on the "extent to which a jury is going to identify with the perpetrators" he said, "some might say ?that's terrorism'; some ?that isn't.'" The insurance industry can't rely on the treasury secretary."

Mr. Thomas described the Act as it stands as "one-size-fits-all that pretty much doesn't fit anybody."

The Act, he said, leaves a high burden on commercial purchasers and insurers. And with issues so problematic, there is a price issue, he said. Insurers have difficulty determining when terrorism will occur as a one-in-100-year event.

"Given uncertainty, a greater risk load is warranted," he said and insurers will be asking a price that is more than buyers are going to want to pay.

It will be hard for insurers to see the value of providing terrorism insurance and Conning foresees "only the largest insurers being able to play in this game."

Over time, he suggested, there may be specialized insurers that deliver a terrorism product that is more acceptable in terms of price and informational ability.

He explained that information ability meant being able to credit insureds for loss protection measures that might, for example mean the installation of more security cameras at a location.

Connings study of the issues is available at the company Web site, www.conningresearch.com or by calling 888 707-1177.