Despite some strong disagreement, the debate on solutions for American terrorism insurance has defined important areas of emerging accord, particularly in light of the potential risk of an attack using a weapon of mass destruction.
This article–abridged and edited from the chapter on terrorism, insurance and preparedness in my book, "Seeds of Disaster, Roots of Response"–includes specific recommendations for development of a long-term solution as we approach the final months of the already extended Terrorism Risk Insurance Act.
Policymakers should consider whether commercial insurance should be formally classified as "critical infrastructure" within the Department of Homeland Security charter. In fact, TRIA should be entirely moved from the Treasury Department to DHS, which would integrate all of the critical needs for a holistic risk management solution based on preparedness, information sharing and risk financing.
With its charter formally expanded, I contend that DHS should then be required to develop reasonable, economically feasible minimum preparedness and construction standards in collaboration with the private sector. As suggested by the Consumer Federation of America and others, policymakers need to consider requiring compliance with new, minimum loss-mitigation standards as a prerequisite for the availability of any insurance policy backed by the federal program.
Risk-adjusted, minimum preparedness standards would do more than improve the safety of property and the workplace. They would also establish a basis for future judges and juries to consider as the new benchmarks for "prudent" behavior and "negligence" in our new world or risk.
New minimum preparedness standards could help ensure adequate capacity and acceptable pricing for perceived high-risk liability exposures such as port authorities and commercial real estate owners in major urban areas.
Although there is at least some theoretical justification for what critics call TRIA's "free" reinsurance "subsidy" (given the government's requirement that insurers make available terrorism insurance), there are practical benefits to making an upfront charge. Consideration should be given to setting the charges at some level above the best actuarial estimate to encourage private-sector alternatives.
Properly conceived in a new program on a by-line, risk-adjusted basis, upfront charges could be invaluable in building a "bank" to limit taxpayer risk.
Assuming policymakers opt for a new program limiting taxpayer risk as much as possible, the two commercial lines most important to retain are workers' compensation and business interruption (or "business income") coverage.
Workers' comp is essential because almost all states require employers to buy the coverage, and underwriters are given no ability in any state to exclude terrorism or place a policy limit on the coverage.
Business interruption is critical because it ensures that businesses have a flow of money during the restoration period after an attack–leading RAND economists to call it a "counter-terrorist tool."
Perhaps most importantly, as many observers have commented, American risk managers, insurers and policymakers need to understand that while the risk of a terrorist WMD attack must be addressed, terrorism is only one of the risks we need to face.
In fact, from a global underwriting perspective, Jardine Lloyd Thompson's "2006 Global Terrorism Ranking" shows 40 other nations at greater terrorist risk than the United States.
The wisest investments in loss mitigation are mostly those offering fungible benefits regardless of the cause of loss, such as improved first responder capabilities, better emergency action training and continuously refined business continuity planning.
Some policymakers undoubtedly will continue to believe that a federal role is not justified because of the lack of a "market failure" after Sept. 11, 2001.
One of the philosophical forefathers of this thinking appears to be Thomas Paine, who penned the late eighteenth century credo: "The government that governs best is the government that governs least."
This staunch libertarian–the person perhaps most responsible for rallying colonists to join the Revolutionary War–understood that, when we are confronted with historically unique situations challenging our collective security, Americans need to put aside traditional thinking and ideological differences and be both "open and resolute." He also knew that when national security is at risk, a hands-off approach is impossible.
If Mr. Paine had witnessed the tragedies of 9/11 and Hurricane Katrina, his opinion on the need for improved federal leadership and commitment would, almost certainly, be "yes," because in our new world of risk, this is a matter of "common sense."
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