A major insurance brokerage has warned the U.S. Treasury Department that few carriers are willing to insure the unquantifiable risk of terrorism unless they have the backstop provided in the Terrorism Risk Insurance Act.
Responding to the request for comments by a Treasury Department market study group examining the need for TRIA, which is due to expire next year, Chicago-based Aon called for the government to put in place a permanent solution.
"The future outlook will be very bleak unless we begin to formulate the basis for a long-term solution with all due haste," the company wrote.
Pressure from rating agencies, the comments went on to say, would force insurers to substantially raise rates for terrorism coverage, or exclude the risk altogether, while businesses retain more risk, the response said. It added this reality is something that has not gone into considerations of TRIA's future in the past.
"This public/private partnership has served us well in the absence of a realistic private solution," Aon said, but the industry would "revert to its pre-TRIA stance and exclude the risk if not forced to offer coverage," should TRIA expire as it is scheduled to do at the end of 2007.
"The less insurance risk transfer, the greater the exposure to the economy in general if another major catastrophic terrorist attack should occur," the response went on to say.
It continued, "Whether directly or indirectly, the federal government would pay the price of additional terrorism loss, so it is to everyone's best advantage to work toward a solution."
The reality of the potential destructiveness of a terror attack has done little to instill confidence in the industry that it can adequately price the risk, according to Aon.
The company also advised that the inability of models to confidently predict an event and the potential for losses that could undercut the industry's current surplus leave insurers more apt to shy away from accepting the full risk, especially on the reinsurance market side.
Aon noted there is little capacity today for standalone coverage, and there is nothing to indicate there will be any growth in the future.
"Said differently, the knowledge gained has not produced confidence; it has created discomfort with the exposure," Aon said.
Aon said it doubts states would have the time or financial where-with-all to adopt solutions should TRIA expire, and that most insurers would probably institute exclusions or withdraw from markets where they find the risk unmanageable.
The brokerage said its position is that this is not a state issue but a federal and global one, calling for a federal answer.
On the issue of chemical, nuclear, biological and radiological (CNBR) terror attack, there is no coverage for this risk in the standalone or all risk market, Aon said. Some clients have managed to secure terror coverage under environmental or pollution liability policies, but Aon pointed out that the policies are limited in scope.
Coverage is available in the workers' compensation market, but this exposure is causing carriers to "reassess their participation in the market" without a TRIA backstop, Aon said.
Reinsurers, Aon's response added, will not take on CNBR risk, noting that they and primary insurers see the risk "as a 'company killer,' where the potential gross aggregate PML (Probable Maximum Loss) is well in excess of the industry's entire capital base."
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