Even so, TRIEA leaves insurers on the hook for larger payouts. What’s more, it raises the triggering event to $50 million in 2006 and $100 million in 2007, way up from the original $5 million. “Washington is sending private insurance markets a clear signal,” says James Valverde, director of economics and risk management for the Insurance Information Institute. “It wants them to handle this risk.”
It’s not entirely clear that they can. After 9/11, premiums for terror coverage (generally, all-risk commercial policies that do not exclude terrorist acts) skyrocketed. Reportedly, Chicago O’Hare International Airport carried $750 million of terrorism insurance — with an annual premium of $125,000 — before the events of September 11. After, insurers are said to have offered the airport just $150 million in coverage. The annual premium? Almost $7 million.
With the government cushion, the price of terrorism coverage has dropped substantially of late. That, in turn, has triggered something of a buying spree among corporate customers. Insurance broker Marsh Inc. found that close to 50 percent of the commercial and government entities it surveyed had some type of terrorism insurance in the fourth quarter of 2004 — twice as many as 18 months earlier.
But the percentage will plummet if the federal program is not renewed again. The mere prospect of the government backstop expiring could put pressure on premiums by mid-2007. If the act isn’t extended, the cost of terrorism coverage will skyrocket — when it’s available at all. One industry expert says some insurers would likely have cut terrorism coverage capacity “dramatically” if the original legislation had not been in place.
Such a pullback could prove to be a double whammy for finance executives at companies with a high exposure to terrorist attacks. CFOs at real-estate companies, for example, may find it difficult to line up funding for commercial-property developments without terrorism insurance. And as Burchill points out, reinsurers have little interest in backing policies that cover U.S. businesses against terrorist attacks.
That’s bad news for risk managers, since terrorists seem to have plenty of interest in attacking U.S. businesses. Even before September 11, American companies were a major terrorist target, accounting for 178 of 206 global attacks in 2000. Peter Ulrich, senior vice president of model management for Newark, California-based insurance industry advisory firm RMS, theorizes that the war in Iraq has diverted many of the attackers. But he warns that the cradle of civilization is now serving as an incubator for a new wave of terrorists. Ulrich expects that when the fighting subsides, those terrorists will migrate west, first to Europe, then to the United States. And as Valverde points out, the critical infrastructure in America is “vast, and more than 80 percent privately owned.”
Another major strike on U.S. soil would sorely test the ability of some insurers to make good on policies. The 9/11 bombings are thought to have cost carriers $32 billion — twice the payout of Hurricane Andrew. Experts estimate total claims of $60 billion to $100 billion could lead to widespread industry insolvencies.
TRIEA might help avert that scenario. But insurers that received the federal funds would have to pay the money back to the government over time. Toward that end, the act empowers carriers to immediately raise property-and-casualty premiums by up to 3 percent, even for companies that carry no terrorism insurance. TRIEA’s $100 billion ceiling would easily be surpassed in the case of a catastrophic event — such as a chemical, biological, or nuclear attack.