The group life insurance market is doing well without extra government terrorism insurance backing, but protecting the insurance industry as a whole against attacks made using weapons of mass destruction remains problematic, according to a presidential study group report released today.
In the report, the President's Working Group on Financial Markets makes no recommendations about extending the Terrorism Risk Insurance Act.
TRIA provides insurers with government supports when terror attack losses exceed certain parameters.
Congress voted in 2005 to extend TRIA to the end of 2007, and it asked the working group to study how the government should handle terrorism insurance risk after 2007.
A letter with the working group report says the TRIA measure was never intended to be permanent. But the working group, which operates under the Treasury Department, makes no firm suggestions regarding the implementation of a long-term terrorism risk solution, or what form any solution should take.
Publication of the working group report comes on the heels of release of a Sept. 26 terrorism insurance study by the U.S. Government Accountability Office. The GAO study concludes that Congress should limit government support for terrorism reinsurance to nuclear, biological, chemical and radiological risks.
The PWG report notes that much of the industry has made progress in understanding the severity of terrorism risk, although figuring frequency and severity of nuclear, biological, chemical and radiological risks, remain problematic.
"TRIA appears to negatively affect the emergence of private [terrorism] reinsurance capacity because it dilutes demand for private sector reinsurance," the PWG warns.
The Property Casualty Insurers Association of America, Des Plaines, Ill., says it disagrees with that conclusion and believes TRIA's federal backstop, "is the single reason any private market whatsoever exists in this area."
In a letter to Senate Banking Committee Chairman Richard Shelby, R-Ala., Treasury Secretary Henry Paulson does say positively that TRIA "has helped support a continued increase in private sector participation in the terrorism risk insurance marketplace," even with the changes made in the extension legislation raising the thresholds for government involvement and insurance company deductibles.
"TRIA was not intended to be permanent, but rather was intended to help stabilize the insurance industry," Paulson adds. "It has been successful in that regard, as the insurance industry is in a better position now than it was after Sept. 11, 2001, both in terms of financial health and understanding of overall terrorism risk exposures."
The improved understanding of terrorism risk and the improved ability to model for terrorism losses are among the major factors for a stronger terrorism insurance market, the PWG says in its report.
"The amount of capital an insurance company is willing to allocate to a particular risk, line or region is based largely on its understanding of its maximum loss under different scenarios," the group says in the report. "To that end, insurers have made greater use of sophisticated modeling of severities of terrorism events to measure and manage accumulations of risk in any given location or area. Improved risk accumulation management allows insurers to diversify and control their terrorism risk exposures, and may encourage additional capacity in the long term."
However, the report also says problems continue to exist in modeling for frequency of terrorist attacks, listing it among the factors making it difficult to determine if a long-term private market solution to the terrorism risk issue will be found.
