Insurance industry split over legislation to address risks posed by terrorist attacks

The thorny question of how to cover the losses from a dirty bomb or other doomsday scenario has been holding up a House bill to renew the federal backstop for terrorism insurance.

Financial Services Committee staffers seem inclined to add nuclear, biological, chemical and radiological (NBCR) attacks to the conventional terrorism risks covered under the backstop, which was created after the Sept. 11, 2001 attacks and renewed twice. The staffers told stakeholders they plan to unveil draft language for the bill by the end of this week.

Few lobbyists are banking on seeing a draft so soon, as the complexity of the NBCR issue already has caused more than one declared deadline to slip.

“The more they’ve learned about this, the more they realize how complicated this is,” the senior vice president for government relations for the National Association of Mutual Insurance Companies (NAMIC), Carl Parks, said.

There currently is no market for NBCR insurance because insurers have only the scantest experience — the nuclear bombs dropped on Hiroshima and Nagasaki — on which to model the risk. Also, insurers are  loathe to cover a risk that could drive many of them to ruin: The American Academy of Actuaries estimated that insured losses from an NBCR attack could top $700 billion.

A group of large commercial policyholders, including real estate investment firms, national banks and manufacturers, has been clamoring to add NBCR risk to the renewal of the Terrorism Risk Insurance Extension Act (TRIEA), which is due to expire at the end of the year.

The issue has split the insurance industry, pitting large and small insurers against each other.

Many large insurers already are on the hook for NBCR losses because they write workers’ compensation insurance and laws in every state prevent insurers from excluding nuclear hazard or pollution from workers’ comp policies.

But the bulk of small- and medium-sized insurers do not offer workers’ comp and therefore have no exposure to NBCR risk. Led by the Property Casualty Insurers Association of America (PCI) and NAMIC, they are balking at a proposal to require them to offer NBCR insurance.

Nuclear bombs and other unconventional attacks by terrorists are akin to acts of war or other uninsurable risks that the federal government normally shoulders, PCI’s senior vice president for federal government relations, Ben McKay, argued: “Is that really an insurer’s problem?”

In an unusual alliance, the American Insurance Association (AIA), which represents many of the large workers’ comp insurers, and the Coalition to Insure Against Terrorism (CIAT), the policyholders’ group, in April called on lawmakers to require the federal government to foot all NBCR losses in excess of an unspecified amount to be paid by insurers. Called an insurers’ retention or deductible, it would be set below the 20 percent deductible for conventional terrorism losses in the current program. In exchange, insurers would agree to provide NBCR coverage in addition to conventional terrorism coverage.

Policyholders insist that taxpayers are already exposed to the losses from nuclear and other mega-catastrophes and that their exposure can be limited if the private market is given incentives to provide insurance.

“Ultimately, policyholders and taxpayers are exposed by NBCR attacks, the most catastrophic types of events for which there is very little coverage in the market,” said Brendan Reilly, senior vice president for government relations at the Commercial Mortgage Securities Association, a member of CIAT. “However, if NBCR is included in the program and addressed appropriately, it will promote the expansion of private-sector coverage in a way that protects policyholders, taxpayers and the overall market.”

Though the House passed a bill to extend the backstop in 2005 that included NBCR, the CIAT-AIA proposal met resistance on Capitol Hill as lawmakers expressed reluctance to expose taxpayers to unlimited losses after a nuclear bomb. The government’s exposure under the current program is capped at $100 billion.

Forced to soften their stance, CIAT and AIA now are asking for legal certainty that insurers will not have to cover any losses above their deductible. “To the extent that insurers have legal recourse to come back to insurers, we have to have some ways to say, ‘Our cap is our cap is our cap,’” said Leigh Ann Pusey, AIA’s senior vice president for federal relations.

Meanwhile, PCI and NAMIC are fighting any change that would force insurers to cover NBCR risk and urging lawmakers instead to set aside funds to study the issue. In a letter last month to Sen. Chris Dodd (D-Conn.), the chairman of the Senate Banking Committee, and Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, they wrote
that it would be a “serious mistake” to add NBCR coverage to the program.

Financial Services Committee staffers also are grappling with how to add NBCR risk to the program without disrupting the market for conventional terrorism insurance. A recent study by the Rand Corporation, a conservative think tank, concluded that folding NBCR into the program would raise prices and cause take-up rates for terrorism insurance to decline. “That goes against the purpose of the program. It should be structured in a way that promotes private market capacity,” a Republican staffer to a member of the committee said.

However, the Rand analysis did not account for incentives that might spur companies to offer NBCR coverage at reasonable rates, such as walling off their exposure to losses. The think tank will release a second analysis incorporating those factors later this summer.

There are tentative plans for a legislative hearing in the House on June 21, in which a witness from the U.S. Treasury will testify. Any bargain struck between lawmakers and some or all of the stakeholders on NBCR will have to survive the Senate, which has not included NBCR risk when it has renewed the program twice before. Meanwhile, the Bush administration still views the backstop as a temporary measure and was reluctant to extend it last year; it is probably even less inclined to expand it.

Said one financial services lobbyist: “The ability to keep that kind of a deal will be difficult.”