Business Needs More U.S. Help On Terror, RAND Says

WASHINGTON--If the government provided businesses with greater incentive to buy private terrorism insurance against additional types of attacks it would reduce the government's potential loss exposure from terrorist coverage it provides, according to a study.

The findings came from the RAND Corp. nonprofit think tank, which suggests the ultimate cost to the government from a chemical, nuclear, biological or radiological attack would be less if there was more government support for businesses to purchase the coverage than under the current program.

The study explains that under the RAND models, lower costs from a CNBR attack could result if industries already had insurance protection.

RAND's report buttresses a recent report by Marsh, a subsidiary of the New York-based services firm Marsh & McLennan Companies, which said that businesses believe terrorism insurance is a valuable risk management component.

As a result, the Marsh report said, slightly more firms have purchased it and retained it despite property insurance rate increases in 2005.

The Marsh report said 59 percent of companies in the United States purchased or renewed their property terrorism coverage in 2006, up one percentage point from 2005.

RAND found that government support for insurance protection against conventional attack "causes the take-up rate for terrorism coverage for conventional attacks to be higher than it would be without the program, leading to lower costs borne by businesses affected by the attack in a substantial number of the scenarios examined."

"While TRIA does increase the cost to taxpayers in scenarios involving the largest attacks, the expected cost to taxpayers should a conventional attack occur is lower with TRIA than without TRIA under a wide range of assumptions anchored around existing estimates of the probability of large attacks," study said.

"Transferring risk for the largest events to taxpayers provides benefits in terms of lower uncompensated losses and lower taxpayer costs in the most likely scenarios," the study added.

The preliminary results of the study were released by RAND just as the House Financial Services Committee prepares to release a draft for industry scrutiny of proposed legislation extending the current program. The program expires Dec. 31.

The industry has been lobbying hard for greater coverage of CNBR in any new legislation. A coalition of the American Insurance Association and the Coalition to Insure Against Terrorism, which represents policyholders, has proposed a compromise whereby under the new bill the retention rate for industry coverage would remain at the current 20 percent if the government were to specifically include CNBR.

Smaller insurers, led by the Property Casualty Insurers Association of America and the National Association of Mutual Insurance Companies, are balking at the proposed compromise.

They say that they can ill afford the current 20 percent mandated retention for conventional terrorism attacks, and adding a mandate to offer CNBR in exchange for retaining the current retention rate would likely render most of their members insolvent in the event of a attack.