Insurers will need government backup to fund business in areas at high risk for terrorist attacks beyond December 2007, when a federal measure is set to expire, industry officials told lawmakers yesterday.
But lawmakers told them that backup will not be permanent, although currently still necessary.
“The industry needs to make substantial progress with its prediction models,” said Rep. Luis V. Gutierrez, Illinois Democrat, at the joint House hearing of the Financial Services and Homeland Security committees.
After the September 11, 2001, terrorist attacks, Congress created a temporary insurance program that uses public and private funds to pay for 90 percent of the losses resulting from terrorism if the insurance companies paid the first $10 billion for two years.
After two years, insurers were responsible for 10 percent of the costs. In 2007, the government will cover 85 percent.
The measure was enacted in 2002 and extended in 2005 until Dec. 31, 2007. Both versions authorize up to $100 billion of federal funds.
Before September 11, terrorism was usually included in “all risk” coverage because the chance of an attack was considered minimal, said Jeffrey D. DeBoer, president and chief executive officer of the Real Estate Roundtable, which represents the leadership of private and public U.S. real estate firms.
“We must operate on the certainty of a terrorist attack in the near term,” said Rep. Sue W. Kelly, New York Republican and chairman of the House Financial Services oversight and investigations subcommittee.
The catastrophic damages of September 11 prompted reinsurance companies, which back up primary insurers, to decide they no longer could quantify the risk for policyholders and effectively withdrew their services, Mr. DeBoer said.
As a result, primary insurers had no backup, withdrew their services where they legally could and still are hesitant to offer coverage, he said.
The September 11 attacks cost $32.5 billion in insured losses.
“Without adequate reinsurance availability, primary insurers will not risk the exposure to their company associated with potential catastrophic terrorism losses,” Mr. DeBoer said.
In the real estate industry alone, more than $15 billion of transactions were stalled or canceled in the 14 months after September 11 because of a lack of terrorism insurance, Mr. DeBoer said.
In the District, one of the most at-risk cities in the U.S., insurers threatened to cancel coverage or increase rates on buildings near potential terrorist targets.
Although insurers have historical data to predict the risk of natural disasters, the unpredictable nature of terrorism means it is difficult to predict the timing, location, target and severity of a terrorist attack, said Terry Fleming, director of external affairs for the Risk and Insurance Management Society, a professional risk management association.
Risk management includes analyzing the probability a loss will occur and trying to prevent that loss, Mr. Fleming said.
A private-public partnership is necessary because private companies may not be able to cover huge losses, said Peter Ulrich, senior vice president of model management for Risk Management Solutions, a company that predicts the risk of domestic and foreign terrorist attacks.
“There is a chance that a future terrorist attack could cause catastrophic losses on a scale that far exceeds any losses previously faced by the insurance industry and possibly beyond the resources of the insurance industry to pay,” Mr. Ulrich said. “Without TRIA [Terrorism Risk Insurance Act], many insurance companies will take the same decision as they did in 2002 and quit the market.”
Opponents of the measure cite free-market arguments as why the law should not be renewed.
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