Insurance buyers and sellers told lawmakers at a joint congressional hearing last week that terrorism insurance coverage will be virtually unavailable without the help of a government backstop.
Lawmakers voiced their views on key issues as well, including the question of whether the risks involved are insurable by the private insurance market.
Terry Fleming, director of external affairs for the New York-based Risk and Insurance Management Society, said, "We think that some form of public-private partnership is required."
Mr. Fleming, who is also the risk manager for Montgomery County, Md., a suburb of Washington, D.C., reported the responses to a recent survey of RIMS members, in support of that view.
Of the responses, 86 percent said they do not believe they would be able to obtain sufficient coverage at affordable prices absent TRIA or "some other federal backstop," Mr. Fleming said.
He added that an overwhelming majority–82 percent–also believe the program should include coverage against nuclear, chemical, biological and radiological attacks.
Further showing the importance of the TRIA program to the insurance industry, Mr. Fleming said that 75 percent of respondents to the survey said their policies written before the end of last year contained clauses conditioned upon the program being extended.
Christopher Lewis, vice president of alternative market solutions and property and casualty capital management for The Hartford Financial Services Group, argued that it is impossible for insurers to assess their terrorism exposure adequately. Terrorism "fails to meet the fundamental requirements of insurance," he said, noting that those requirements are that risks be homogeneous, random and independent, and their sources are understood.
"Hence, absent a fundamental change in the nature of the terrorist threat, terrorism will remain an uninsurable risk for the private market, and any credible solution for financing the risk will require a continued public-private partnership with the U.S. government," he said.
Members of the House Financial Services Subcommittee on Oversight and the House Homeland Security Subcommittee on Intelligence, Information Sharing and Terrorism Risk Assessment agreed that the federal backstop has played an important role, but there was some difference of opinion as to whether the private market can–or even should–establish its own system for covering terrorism risk.
Rep. Steve Israel, D-N.Y., took note of the urgency of the matter under discussion. "The clock is ticking," he said.
Rep. Israel, who does not sit on either subcommittee, was invited to participate in the hearing. He noted there are only 17 months until the current version of the Terrorism Risk Insurance Act expires.
The task will not be easy, and Rep. Israel acknowledged that he doesn't believe "there's much of an appetite in Congress to give TRIA a second extension."
Rep. Luis Gutierrez, D-Ill., the ranking member of the Homeland Security panel, said that he and others in Congress "do not want to see the federal government as the permanent reinsurer of last resort," although he added, "at least not at the levels of the current TRIA legislation."
Rep. Israel countered that the intent behind terrorist attacks gives government an obligation to bear some of the burden of their outcome.
A terrorist attack, he said, "is not an attack on a building. It's an attack on this country."
Rep. Barney Frank, D-Mass., also argued for a stronger federal role in providing against terrorism attacks.
"The cost of terrorism ought to be borne by the whole country," he said. Although those costs obviously wouldn't be borne on an equal basis between big cities and less likely targets, Rep. Frank said, "to the extent that we can make these costs go across the board, we ought to do that."
Republicans at the hearing, thinking along the same lines as insurance buyers and insurers, focused on the challenges facing those who try to model for terrorism exposures, noting the nature of terrorism itself puts them at a sharp disadvantage.
"The insurance industry faces many challenges when trying to model a terrorism threat," noted Rep. Robert Simmons, R-Conn., who chairs the Homeland Security Subcommittee.
Among the more difficult problems, he cited, is that much of the information that would prove useful in modeling terrorism exposures "is sensitive, classified and locked away in a vault somewhere."
Meanwhile, prior to the hearing, lawmakers who support a long-term solution to the problem of insuring against terrorism risk made their concerns known through letters to the Treasury Department. (Treasury houses The President's Working Group on Financial Markets–a group charged with producing a report on the terrorism insurance market by September.)
Several members of the House–including Reps. Sue Kelly, R-N.Y.; Spencer Bachus, R-Ala.; Rob Simmons, R-Conn.; Pete Sessions, R-Texas.; and Richard Baker, R-La.–wrote to Treasury to express concerns over such areas as the availability of reinsurance and nuclear, chemical, biological and radiological attack coverage, as well as the role of the federal government in ensuring that coverage is available and affordable.
"Terrorism, by its very nature, is different from other risks faced by the insurance industry," Reps. Kelly and Simmons wrote. "In contrast with natural disasters, terrorism is deliberately perpetrated by humans and is extraordinarily difficult to predict.
"As a result, the frequency of terrorist attacks defies risk modeling, and efforts at loss mitigation can be countered by loss maximizing measures by attackers."
The letter continued, highlighting insurers' difficulty in gathering information, owing to the sensitive nature of any incidents that do not actually occur.
"Because of the classified nature of most threat information, insurers cannot properly evaluate the many complex risks associated with terrorism," they wrote. "Insurers and most policyholders do not have access to specific threat information, making the job of calculating the risk of a terrorist attack exceedingly difficult, if not impossible."
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