Terrorism Insurance: Pray As You Go

Without a government safety net, companies are left with little coverage against terrorist attacks.

The Metropolitan Transportation Authority oversees New York City’s subway system, buses, railways, tunnels, and bridges, from the Triboro to the expansive Verrazano Narrows connecting Staten Island to Brooklyn. Had a terrorist destroyed the latter prior to September 11, the MTA would have had recourse to $1.5 billion in property insurance to defray the cost. Were this to happen tomorrow, the state agency would confront financial chaos. “The most insurance I could buy to protect against terrorism was $100 million,” says Gary Caplan, MTA director of budgets and financial management.

As for losses above that amount, New York State taxpayers and farepayers are on the hook. Having absorbed up to $50 billion in claims following the September 11 disaster (in comparison, Hurricane Andrew cost the industry $20 million), insurers and the reinsurance companies that spread their risk are loath to put their capital on the line for future terrorist attacks. That means that companies, municipalities, and other organizations must bear much of the risk themselves on their balance sheets.

In fact, in the past weeks, thousands of companies whose commercial-property, commercial inland marine, farm, crime, and business-owners insurance policies expired on January 1 have received letters stating that the policies will not be renewed as written. While the standard property policy, for example, will still guard against the perils of fire, explosion, smoke, theft, and wind, it will not cover them if terrorism caused the problem.

Companies are left with two options: a separate terrorism policy offering modest limits of protection (up to $150 million), or an add-on to their current policies that provides marginal coverage (about $5 million) through a separate limit of protection–if the insurer is willing to offer it. The implications of such limited coverage have created quite a bit of angst.

“When we tell clients there is no more insurance beyond $150 million, they are nonplussed,” says Suzanne Douglass, executive vice president of Willis Risk Solutions, the MTA’s New York-based insurance broker. “‘What do you mean, we can’t get it?’ they demand. But people are living in la-la land, thinking insurers will change their tune. It’s not going to happen.”

That angst is especially acute in such industries as construction and transportation, considered high risk for terrorism. But some observers fear the lack of coverage could affect the broader economy, as lenders restrict credit to businesses unable to transfer their terrorism risks. “Either they won’t get a loan or the bank assuming the risk will add many basis points and/or fees to the lending rate,” predicts Robert Hartwig, chief economist at the New York-based Insurance Information Institute. “It could unnecessarily put an additional drag on the economy.”

Little Protection
Few blame the insurance industry for rushing for the exits, given the enormous losses caused by September 11. While the industry is in business to bear risk, terrorism is too unwieldy a foe to tackle. “There is no actuarial history from which insurers can ascertain the potential frequency and severity of terrorism risks in order to price it appropriately,” explains Hartwig.

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