A NYC Terror Attack Loss Could Hit $700 Billion

WASHINGTON--A major terrorist attack on New York City could cause an insured loss exceeding $700 billion that would crush commercial insurers, according to an actuaries study.

That estimate was produced by the American Academy of Actuaries, which added its voice to the insurance industry chorus calling for a federal framework to help carriers provide coverage for terrorism risk.

Their analysis of what is needed to sustain a terrorism risk insurance market is among the industry testimony submitted to the President's Working Group on Financial Markets, which is studying the terrorism insurance issue.

Michael McCarter, chairperson of the Academy's Terrorism Risk Insurance Act Subgroup, said: "Without a national framework for managing terrorism risk, insurers would be exposed to losses far greater than they could sustain, significantly damaging their ability to provide the ongoing insurance coverage that is essential to the stability of the entire economy."

According to the Academy, a large chemical, nuclear, biological or radiological (CNBR) terrorist attack on New York City could cause insured losses of $778 billion.

The President's Working Group, operating within the U.S. Treasury Department, is charged with examining the affordability and availability of terrorism coverage.

A mandate for their study was part of the 2005 legislation extending until 2007 the Terrorism Risk Insurance Act, which provides federal support for insurers when losses from terrorism attacks reach certain thresholds.

TRIA was signed into law late last year--days before the program's original sunset date--and significantly raised the loss level required for the federal government to be involved.

The Academy said it conducted models of possible attack scenarios in New York, Washington, D.C. and San Francisco, with the more severe showing as much as $778 billion in damage in New York City.

In the New York model $82 billion in claims would be accounted for by group life; property-casualty insurers would be facing losses of $696 billion, including $484 billion in workers' compensation losses.

A "medium" level event, the group said, resulted in a $447 billion loss in New York and roughly $100 billion each for Washington and San Francisco.

However, the group also noted that claims of "industry capacity" can be misleading because the insurance industry as a whole does not pay claims--individual companies do. As a result, a major event would not necessarily trigger claims that reach all the possible insurance capital.

"Only the capital of insurers providing coverage triggered by a particular event is relevant," the Academy said in its comments to the President's Working Group.

"In the case of the largest modeled CNBR event, over 90 percent of the estimated p-c losses were in commercial lines. In this scenario, in the absence of TRIA or some other national framework for dealing with terrorism insurance losses, many commercial lines insurers would be devastated."

Given the potentially extreme losses in the aftermath of a terrorist attack, the Academy said that insurers would be forced to protect their solvency by limiting their exposure to terrorism-related losses without a national system in place. This could only be done, the Academy noted, by limiting the availability of coverage.