Terrorism Views Aired

Terrorism Views Aired

By Daniel Hays

An initial outline of how the Terrorism Risk Insurance Program will be administered, differing views on terrorist attack predictability and analysis of the new terrorist threat were aired last week at an industry conference in Florida.

The topics were explored by four speakers at the annual symposium of the National Council on Compensation Insurance in Orlando, Fla.

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

TRIP, which is part of the U.S.
Treasury Department, was created after Congress passed the Terrorism Risk Insurance Act. The measure created a reinsurance backstop program designed to cover losses from a foreign terrorist act that, in the first year of the program, exceed 7 percent of the direct earned premium of insurers when any loss event of $5 million or more occurs.

The TRIA is due to expire in 2005 and Mr. Bragg said he did not know if it would be continued. Mr. Bragg, the former administrator of the Federal Insurance Administration during 1981-1986, told his audience that he had presided over the termination of the Federal Riot Reinsurance Program and Federal Crime Insurance Program.

But he pointed out that ending the riot and crime coverage system was fairly unique and that the demise of such government programs is a rare event.

The TRIP director said that he envisions starting a lightly staffed virtual insurance company and once TRIP is fully operational, “were going to duplicate the reinsurance process you already know” for handling claims, he said.

He said his plans for the future include recruiting and hiring staff, implementing claims and audit enforcement procedures, as well as developing a framework for policy surcharge and recoupement procedures and final rules.

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

Terrorist attacks are something that we can expect to face as the major challenge of the 21st Century, political violence authority Brian Jenkins told the NCCI group. Mr. Jenkins, who is a senior advisor for RAND Corporation, the Santa Monica, Calif.-based research organization, said terrorist activities throughout the world, in the past, had some restraints. But as religious fanatics became involved, their operations moved into “indiscriminate large-scale violence.”

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

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

“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 economic attacks, and “the worst-case scenario is now a presumption,” he added.

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

In preparing the model, which is used to assess the threat level for an insurers portfolio, EQECAT looks at potential targets in a locality such as military bases, government buildings and tall buildings.

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

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

Richard L. Thomas, chief underwriting officer for American International Groups Domestic Brokerage Group, said “terrorism is insurable, but only to a point.” A nuclear blast, he said, is not insurable and would exceed the capacity of the property-casualty insurance industry.

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

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

Assessing the TRIA, Mr. Thomas said that it provided some financial parameters on the exposure to risk of loss. The program, he said, would protect the industry against insolvency, but might not be enough to protect individual companies from that fate.

Because reinsurers derive no benefit from TRIA, “a tremendous amount” of coverage they normally would provide has been lost to primary 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 serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.