Terrorism Insurance Legislation

Tal P. Piccione Chairman & Chief Executive Officer

Over the last few months, some critics of the insurance industry have been saying there's no need for the federal government to cover terrorism losses above an established level in the event of another attack on the United States. They argue that insurers are paying September 11 claims without financial impairment. They observe that commerce has not been disrupted; real estate transactions are going ahead; lenders are approving mortgages; and the economy is recovering, however falteringly. So, why extend a helping hand to the insurance industry?

We respect their right to question the need to help our industry. In fact, however, it's not insurance companies that need help. It's the families, property owners, and businesses that will find themselves with little or no property/casualty coverage in the event of another major act of terrorism. Insurers and reinsurers are responsible to cover the hazards that people and businesses face across the spectrum from fender benders to oil rig explosions. The principle of spreading the risk is based on a body of experience upon which to predict loss costs. No such body of experience exists with respect to potential losses from terrorist acts that can range from nuking whole cities to poisoning the water supply. Any Probable Maximum Loss (PML) estimate for horrendous acts of terrorism would result in premiums that would be unaffordable.

Loss costs from September 11 won't be finally determined for some time, but the range seems to be somewhere between $40 and $60 billion. This compares to some $16 billion for Hurricane Andrew, the worst previous insured loss in history. Critics point out that the insurance industry is paying the September 11 claims and continuing to sustain normal operations. Despite the fact premiums were not based on a loss in any way approaching this magnitude, insurers have enough capital to cover World Trade Center claims. However, analysts continue to warn that without restrictions on terrorism coverage, the industry cannot sustain a second hit.

I had the privilege recently - along with two of my senior colleagues - to meet with Sen. Bill Nelson (D-FL). We discussed prospects for legislation to indemnify American citizens and businesses against losses from terrorist acts (see page 1). As the former Insurance Commissioner of Florida, Bill Nelson knows our business. We think Sen. Nelson got it right when he expressed a preference for the government to accept 100 percent of terrorism losses as war risks - the proper responsibility of our federal government.

Sen. Nelson understands that the economy will begin to feel the full brunt of the World Trade Center attack over the next few months as policies in force before September 11 come up for renewal. Terrorism coverage by the private insurance market will be severely restricted, unavailable, or extremely costly. The need for a government backstop will become apparent to even the most serious critics of the insurance industry. It was clear in our meeting with Sen. Nelson that Congress won't enact legislation that relieves the insurance industry of any responsibility to cover terrorist acts. We understand that our industry must accept a limited liability for terrorist losses providing the government acts as the insurer of last resort for claims beyond insurers' capacity to pay.

We thank Sen. Nelson for his input, and we commend Sen. Christopher Dodd (D-CT) who has done an excellent job managing this difficult legislation on the Senate floor. We also salute our industry organizations, the Council of Insurance Agents & Brokers and the Reinsurance Association of America, who have effectively worked toward solutions that respect the interests of all parties.

Final decisions on the amount of loss the insurance industry will be expected to pay before the government takes over will be made in the Conference Committee that must now resolve differences between the House and Senate versions of the bill. We're confident the legislation that is finally placed on President Bush's desk will provide the essential coverage that is beyond the capacity of the private insurance market to supply. This will help restore confidence in the economy when pre-September 11 policies begin to expire and should satisfy critics that the insurance industry is doing its part.