GAO report finds terrorism insurance market deteriorating

Property and casualty insurance coverage against terrorist attacks is dwindling, says a Government Accountability Office (GAO) study released this week. The GAO, responding to a House Financial Services committee request, found most insurers believe such risks are uninsurable because the potential costs are too difficult to measure. Risk management and actuarial efforts have proven of uncertain value, in large part because terrorist acts are so rare yet have the potential to be extremely destructive in unpredictable ways. Workers’ compensation insurers, however, generally offer terrorism coverage because many states limit the exclusion of perils for workers’ compensation. Life and health insurers also still provide terrorism coverage as well. “Given the challenges faced by insurers in providing coverage for, and pricing, [nuclear, biological, and chemical terrorism] risks, any purely market-driven expansion of coverage is highly unlikely in the foreseeable future,” the GAO reported.

There is no shortage of ideas of how to fix the problem. The Terrorism Risk Insurance Act (TRIA), under which the federal government would act as backstop if the losses from a terrorist attack to any particular company were to exceed that insurer’s deductible, is set to expire, and it does not seem likely that it will be extended in its current form. Former American International Group chief executive Maurice Greenberg has proposed allowing insurance companies to create tax-free accounts to build reserves that would be used to cover terrorism losses. The real estate industry, however, worried that insurance companies will not sufficiently indemnify them, has “proposed a $30 billion fund paid for by insurance companies that can be tapped to cover terrorism claims,” the Wall Street Journal reported. “Under the plan, the government would keep serving as an insurance backstop for five to seven years until the fund is operational.” The American Insurance Association, for its part, prefers extending the act in its basic form, with insurers covering attacks caused by conventional weapons up until the federal backstop, and with the federal government covering all losses associated with nuclear, biological, and chemical weapons.

The Treasury Department is expected to release its own report and recommendations by the end of this week.

-read more in Bill Swindell’s Congress Daily report; see also the GAO report