Terrorism Insurance: Measuring and Predicting Losses from
Unconventional Weapons Is Difficult, but Some Industry Exposure
Exists (25-SEP-06, GAO-06-1081).
Terrorists using unconventional weapons, also known as nuclear,
biological, chemical, or radiological (NBCR) weapons, could cause
devastating losses. The Terrorism Risk Insurance Act (TRIA) of
2002, as well as the extension passed in 2005, will cover losses
from a certified act of terrorism, irrespective of the weapon
used, if those types of losses are included in the coverage.
Because of a lack of information about the willingness of
insurers to cover NBCR risks and uncertainties about the extent
to which these risks can be and are being insured by private
insurers across various lines of insurance, GAO was asked to
study these issues. This report discusses (1) commonly accepted
principles of insurability and whether NBCR risks are measurable
and predictable, and (2) whether private insurers currently are
exposed to NBCR risks and the challenges they face in pricing
such risks. GAO collected information from and met with some of
the largest insurers in each line of insurance, associations
representing a broader cross section of the industry and state
insurance regulators. GAO makes no recommendations in this
report.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-1081
ACCNO: A61444
TITLE: Terrorism Insurance: Measuring and Predicting Losses from
Unconventional Weapons Is Difficult, but Some Industry Exposure
Exists
DATE: 09/25/2006
SUBJECT: Biological weapons
Chemical weapons
Insurance
Insurance companies
Insurance losses
Insurance regulation
Nuclear weapons
Prices and pricing
Property losses
Risk management
Terrorism
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GAO-06-1081
* Results in Brief
* Background
* State Regulation of Insurance Companies
* NBCR Weapons Represent Many Methods of Attack
* The Terrorism Risk Insurance Act Program
* Applying Common Principles for Assessing Insurability Presen
* Insurers' Exposure to NBCR Risks Varies Widely by Line of In
* Relatively Little NBCR Coverage Available in Property/Casual
* Although Property/Casualty Insurers Remove Coverage for NBCR
* Demand for NBCR Coverage in Property/Casualty Market Is Diff
* Insurers in Workers' Compensation, Life, and Health Generall
* Workers' Compensation Insurance Generally Covers All Perils,
* According to Life Insurers, They Generally Cannot Exclude Te
* According to Health Insurers, They Face Unique Challenges in
* Principles of Insurability and Assessing Whether NBCR Risks
* Assessing Exposure to NBCR Risks
* GAO Contact
* Staff Acknowledgments
* GAO's Mission
* Obtaining Copies of GAO Reports and Testimony
* Order by Mail or Phone
* To Report Fraud, Waste, and Abuse in Federal Programs
* Congressional Relations
* Public Affairs
Report to the Chairman, Committee on Financial Services, House of
Representatives
United States Government Accountability Office
GAO
September 2006
TERRORISM INSURANCE
Measuring and Predicting Losses from Unconventional Weapons Is Difficult,
but Some Industry Exposure Exists
GAO-06-1081
Contents
Letter 1
Results in Brief 3
Background 4
Applying Common Principles for Assessing Insurability Presents Challenges
in Measuring and Predicting NBCR Risks 8
Insurers' Exposure to NBCR Risks Varies Widely by Line of Insurance and
Insurers Offering Coverage Face Challenges in Pricing 15
Appendix I Objectives, Scope, and Methodology 30
Appendix II GAO Contact and Staff Acknowledgments 36
Related GAO Products 37
Table
Table 1: Description of NBCR Weapons 6
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separately.
United States Government Accountability Office
Washington, DC 20548
September 25, 2006
The Honorable Michael G. Oxley Chairman Committee on Financial Services
House of Representatives
Dear Mr. Chairman:
When considering possible terrorist events, among the most potentially
devastating would be those caused by terrorists using unconventional
weapons, also known as nuclear, biological, chemical, or radiological
(NBCR) weapons. Because of the potential for catastrophic losses from an
NBCR attack, representatives of the insurance industry have voiced doubts
about its ability to pay for such losses, and members of Congress have
raised concerns about costs to the federal government and citizens from
losses not covered by insurance. In response to the insurance industry's
reluctance to cover terrorism risks generally, Congress enacted the
Terrorism Risk Insurance Act (TRIA) of 2002 for the commercial
property/casualty industry, which requires insurers to provide coverage
for terrorism and provides a defined level of reimbursement for certain
losses.1 However, limited information suggests that even with this federal
financial backstop, the insurance industry continues to be reluctant to
provide insurance to cover NBCR risks.
In light of the continuing debate about TRIA, which is set to expire in
2007, the lack of information about the willingness of insurers to cover
NBCR risks, and uncertainties about the extent to which these risks can be
and are being insured by private insurers across various lines of
insurance, you asked that we study the extent to which NBCR risks are
measurable and insurable. This report discusses (1) commonly accepted
principles of insurability and whether NBCR risks are measurable and
predictable and (2) whether private insurers currently are exposed to NBCR
risks and the challenges they face in pricing such risks.
To identify commonly accepted principles of insurability and whether NBCR
risks are measurable and predictable, we reviewed standard insurance
references to identify principles that insurers consider when evaluating
the insurability of risks. We relied primarily on Fundamentals of Risk and
Insurance.2 To determine the insurability of NBCR risks, we compared
information we collected about the market for and nature of NBCR terrorism
risk to the principles. Moreover, we obtained information from a limited
number of insurance industry representatives, as well as firms that
specialize in modeling terrorism and other catastrophic events for
insurers (modeling firms), to identify the amount and types of data
available to predict future losses from NBCR terrorist attacks.3 For
comparison, we also obtained descriptions of data typically available to
calculate losses for other catastrophic risks such as hurricanes. To
assess whether private insurers were exposed to NBCR events and how they
price for NBCR risks, we identified state requirements for coverage of
NBCR events, lines of insurance where insurers cover NBCR damage of their
own accord, and circumstances where coverage of NBCR events could be less
clear. Specifically, we obtained documentation on state requirements from
the National Association of Insurance Commissioners (NAIC) and visited two
states and the District of Columbia, which contain localities that are
considered to be at higher risk than others for a terrorist attack. To
assess whether lines of insurance could be exposed to NBCR attacks, we
reviewed government and industry studies to obtain broad estimates of the
amount of NBCR coverage for commercial property/casualty insurance
available on the market, but these studies had certain methodological
limitations. We also interviewed at least two of the larger insurers in
each of the major lines of insurance (commercial and personal
property/casualty, workers' compensation, and individual and group life
and health); commercial property/casualty and group life reinsurers
(companies that provide insurance for insurers); and selected trade
associations. Although we obtained information from a limited number of
insurers, we selected the insurers based on their market share for each
line of insurance nationwide and in states with localities considered to
be at higher risk for terrorist attacks. The insurers we selected
represented between 13 and 38 percent of the national market for each line
of insurance. To determine circumstances under which coverage of NBCR
events might be less clear, we interviewed insurers and identified
examples of language relating to coverage in insurance contracts that
could be contested. Finally, to determine if and why insurers would be
willing to offer more coverage for NBCR events in the future, we
interviewed representatives of insurers, insurance trade groups,
policyholders, and academic experts.
1Pub. L. No. 107-297, 116 Stat. 2322 (Nov. 26, 2002), codified at 15
U.S.C. S: 6701 note.
2Emmett J. Vaughan and Therese Vaughan, Fundamentals of Risk and
Insurance, 9th ed. (Hoboken, N. J.: John Wiley & Sons: 2003).
3From an insurance company perspective, a catastrophe is one that has the
potential to cause severe losses to an insurance company relative to its
available financial resources.
We conducted our work in California, New Jersey, New York, Massachusetts,
and Washington, D.C., from February 2006 through September 2006 in
accordance with generally accepted government auditing standards.
Results in Brief
Insuring NBCR risks is distinctly different from insuring other risks
because of the potential for catastrophic losses, a lack of understanding
or knowledge about the long-term consequences, and a lack of historical
experience with NBCR attacks in the United States. Measuring and
predicting NBCR risks present distinct challenges to insurers because the
characteristics of the risks largely diverge from commonly accepted
principles used in determining insurability. According to these common
principles, when assessing insurability, the risk generally must (1) have
past occurrences sufficient in number and homogeneous enough (invoking the
"law of large numbers") to enable insurers to accurately predict future
losses, (2) be definite and measurable in terms of dollar value, (3) occur
by chance, and (4) not result in catastrophic losses for the insurer.
Although these principles of insurability generally underlie insurers'
decisions about what risks to insure and at what price, experience with
NBCR and other more common risks illustrate that insurability occurs along
a continuum. That is, at one end are risks that satisfy all the principles
and are most likely to be insured and at the other end are risks that
satisfy none of the principles and are least likely to be insured. In
general, NBCR risks largely fail to meet most or all of the principles of
an insurable risk. Indeed, insurance experts we interviewed said that the
potential severity of NBCR risks alone could diminish the willingness of
some insurers to insure NBCR risks.
Although NBCR risks may not fully satisfy the principles of insurability,
there are enough variations across lines of insurance that some insurers
or some lines of insurance may have no willingness to offer coverage for
NBCR, while others may choose to offer coverage for some or all of the
risks. For example, even with TRIA, property/casualty insurers generally
have attempted to limit their exposure to NBCR risks by excluding nearly
all NBCR events from coverage, both for commercial property/casualty and
homeowners. According to industry representatives, property/casualty
insurers believe they have excluded NBCR coverage by interpreting existing
exclusions in their policies to apply to NBCR risks, but some of the
exclusions could be challenged in courts. However, unlike
property/casualty insurers, workers' compensation, life, and health
insurers are exposed to NBCR risks and generally have not excluded them
from coverage for a variety of reasons. Specifically, workers'
compensation insurers generally offer NBCR coverage because many states
limit the exclusion of any peril for workers' compensation. Conversely,
while life and health insurers may not always be required to insure NBCR
risks, they generally face other challenges in segregating and excluding
NBCR risks. Another reason that life and health insurers may be more
willing to insure NBCR risks is that while the loss of life and health
effects from an NBCR event may be damaging to some companies, large life
and health insurers might be able to diversify their risks geographically
and spread their losses over time. However, representatives of workers'
compensation, life, and health insurers expressed concerns that the prices
they currently charge may not cover their potential exposures to NBCR
risks, sometimes because of regulatory limitations, and generally because
of difficulties in measuring and pricing for NBCR losses. Given the
challenges faced by insurers in providing coverage for, and pricing, NBCR
risks, any purely market-driven expansion of coverage is highly unlikely
in the foreseeable future.
Background
The insurance industry offers many types of coverages intended to protect
businesses as well as individuals. While the extent of regulation varies
by state and by line of insurance, state insurance regulators oversee the
provision of insurance; for example, states may approve the rates (prices)
insurers may charge and require insurers to cover certain events. In order
to ensure the availability of terrorism coverage after September 11,
Congress enacted TRIA to temporarily provide some property/casualty
insurers some reimbursement for insured losses, including workers'
compensation losses, resulting from specific acts of terrorism.
Insurance can be grouped into three main types: property/casualty, life,
and health. Property/casualty insurance includes several types of
insurance. Commercial property/casualty insurers cover physical losses to
property, business interruptions or loss of use of buildings due to
property damage, and also legal liability related to the maintenance of
the property and business operations. Workers' compensation insurance is
considered a separate category of commercial property/casualty insurance,
and the insurers provide employers protection against work-related
disability and death. In addition, with certain exceptions, almost all
employers are required to provide some form of workers' compensation
insurance to cover employer liability for workers who are killed, injured,
or disabled on the job from any cause.4 Personal lines of
property/casualty insurance include policies for homeowners and automobile
coverage. Homeowners insurance provides coverage for physical losses to
the home, its contents, and additional living expenses for the owner while
the home is uninhabitable.
Life insurers sell either individual or group policies that provide
benefits to designated survivors after the death of an insured. Health
insurers cover medical expenses resulting from sickness and injury.
State Regulation of Insurance Companies
States have primary responsibility for regulating the insurance industry
in the United States, and state insurance regulators coordinate their
activities in part through NAIC. The degree of oversight of insurance
varies by state and insurance type. In some lines of insurance, such as
workers' compensation, insurers may file insurance policy forms with state
regulators, who help determine the extent of coverage provided by a policy
by approving the wording of policies, including the explicit exclusions of
some perils. According to an NAIC representative, while practices vary by
state, state regulators generally regulate prices for personal lines of
insurance and workers' compensation policies but not for group life or
commercial property/casualty policies. In most cases, state insurance
regulators perform neither rate nor form review for commercial
property/casualty insurance contracts because it is presumed that
businesses have a better understanding of insurance contracts than the
average personal lines consumer. However, reinsurers-companies that
provide insurance to insurers-generally are not required to get state
regulatory approval for the terms of coverage or the prices they charge.
NBCR Weapons Represent Many Methods of Attack
Terrorism attacks, particularly including those using NBCR weapons, could
result in catastrophic losses. Each type of weapon-nuclear, biological,
chemical, and radiological-represents different methods of attack.
Further, many different agents can be used to carry out a biological,
chemical, or radiological attack. See table 1 for general descriptions of
each type of weapon and examples of available agents.
4Employers may cover employees for work-related injuries, illness, and
death by purchasing an insurance policy from a company licensed by the
state, or employers may self-insure.
Table 1: Description of NBCR Weapons
Weapon description Examples of agents
Nuclear A nuclear explosion would have The explosion of the
immediate blast effects that weapon, a bomb or missile,
would destroy buildings. The would be generated through
explosion also would produce nuclear fission of uranium
high-energy radiation and extreme or plutonium atoms, or
heat, and form a cloud from which nuclear fusion of hydrogen
highly lethal radioactive isotopes.
material would fall. The overall
effect of the weapon would depend
on the size of the weapon and how
high above the ground the
detonation occurred.
Biological Biological attacks can involve Many different agents such
two basic types of biological as smallpox or anthrax,
agents: contagious and each with its own
noncontagious. With most characteristics, could be
biological agents, an attack may used for biological
not be recognized immediately attacks.
because the symptoms may be
attributable to several causes or
because the disease the agent
causes has an incubation period.
Chemical Chemical attacks entail the Many different agents such
dispersal of chemical vapors, as sarin and hydrogen
aerosols, liquids, or solids and cyanide, each with its own
affect individuals through characteristics, could be
inhalation or exposure to eyes used for chemical attacks.
and skin. Chemical weapons act
very quickly to kill or harm
humans, often within a few
seconds.
Radiological A "dirty bomb" uses conventional Different radioactive
explosives to disperse agents, including
radioactive material across the americium, cesium, and
immediate area, which could vary plutonium, could be used to
in size depending on the size of create a dirty bomb.
the explosive. The primary
short-term exposure hazard to
humans would be inhalation of
radioactive material suspended in
the dust and smoke from the
explosion.
Sources: RAND, GAO.
Notes: For weapon descriptions, see Rand Public Safety and Justice,
Individual Preparedness and Response to Chemical, Radiological, Nuclear,
and Biological Terrorist Attacks (Santa Monica, California: 2003). For
examples of biological and chemical agents, see GAO, Combating Terrorism:
Need for Comprehensive Threat and Risk Assessments of Chemical and
Biological Attacks, GAO/NSIAD-99-163 (Washington, D.C.: Sept. 14, 1999).
For examples of radiological agents that can be used in dirty bombs, see
GAO, Nuclear Security: DOE Needs Better Information to Guide Its Expanded
Recovery of Sealed Radiological Sources, GAO-05-967 (Washington, D.C.:
Sept. 22, 2005).
The agents used to undertake NBCR attacks have differing characteristics
and properties and would affect people and property in myriad ways. Of the
four types of NBCR attacks, a nuclear bomb would be the most likely to
result in fires of any consequence. The intense heat produced by the
nuclear explosion and subsequent reactions could produce extensive fires
located throughout the area of detonation. While the detonation of a dirty
bomb (conventional explosives used to disperse radioactive material) could
result in blast damage, the resulting fire damage likely would be confined
to the immediate area. However, the detonation of both nuclear and dirty
bombs would release radioactive materials, resulting in the need to
decontaminate buildings and provide immediate healthcare. The distance
these radioactive agents disperse from the original detonation site would
depend on many factors, including the strength of the explosive and
meteorological conditions. While the release of chemical and biological
agents is significantly less likely to result in fires of any consequence,
the agents also have the potential to contaminate buildings and make them
unusable for long periods. These agents could be released within buildings
or outdoors, with chemical agents more likely than biological agents to
result in immediate harm to humans. All NBCR attacks, depending on size of
the explosion or the quantity of the agent, have the potential to result
in fatalities, injuries, or illness.
The Terrorism Risk Insurance Act Program
After the events of September 11, when certain coverage for terrorism
events disappeared, Congress passed TRIA.5 This law created a temporary
program that effectively functions as reinsurance-for the commercial
property/casualty and workers' compensation insurance industries only.6
Under TRIA, the federal government would reimburse insurers in these lines
for 90 percent of their losses, up to a specified level, after the
insurers paid a deductible. The program also would cover losses caused by
NBCR attacks, if insurers had included this coverage in an insurance
policy. However, coverage of NBCR attacks, as with other terrorist
attacks, would have to meet the program's criteria to trigger
reimbursements.
TRIA requires certain insurers to "make available" coverage for terrorist
events that the Secretary of the Treasury has certified as committed by
individuals acting on behalf of a foreign person or interest.7 Commercial
property/casualty insurers must offer terrorism coverage to their
policyholders, although they could impose an additional charge.
Policyholders have the option of not purchasing the coverage and adding a
terrorism exclusion to their policies. If policyholders chose to purchase
the terrorism coverage for their property/casualty policies, insurers then
could not add any additional exclusions or conditional language to the
policies.
5For more information on TRIA, see GAO, Terrorism Insurance:
Implementation of the Terrorism Risk Insurance Act of 2002, GAO-04-307
(Washington, D.C.: Apr. 23, 2004).
6For purposes of TRIA, "property and casualty insurance" includes
commercial lines of property/casualty insurance, including workers'
compensation and directors and officers' liability insurance. It does not
include other types of insurance such as federal crop insurance, medical
malpractice insurance, health or life insurance, commercial automobile
insurance, burglary and theft insurance, professional liability insurance
or farm owners multiple peril insurance. 15 U.S.C. S: 6701 note (Pub. L.
No. 107-297, S: 102(12)).
7TRIA defines "make available" to mean that insurers subject to TRIA must
offer coverage for insured losses arising from certified terrorist events
and that the coverage not differ materially from the terms, amounts, and
limitations applicable to other types of coverage.
In December 2005, Congress extended many of the same provisions of the
original statute in the Terrorism Risk Insurance Extension Act of 2005,
but increased the required amount insurers would have to pay in the
aftermath of a terrorist attack.8 While deliberating the extension of
TRIA, Congress considered whether to cover additional lines of coverage,
such as group life insurance, and set a lower deductible that applied only
to NBCR terrorist events. However, Congress did not enact these changes.
The TRIA extension, which continues to apply only to the commercial
property/casualty industry, is set to expire on December 31, 2007.
Applying Common Principles for Assessing Insurability Presents Challenges in
Measuring and Predicting NBCR Risks
Several commonly accepted principles underlie insurers' ability to
determine whether to offer coverage for a particular risk and at what
price. Ultimately, the decision becomes a question of whether sufficient
information exists for insurers to accurately estimate potential losses.
According to standard insurance theory, four major principles contribute
to the ability of insurers to estimate and cover future losses: the law of
large numbers, measurability, fortuity, and the size of the potential
losses.9 However, measuring and predicting losses associated with NBCR
risks can be particularly challenging for a number of reasons, including
lack of experience with similar attacks, difficulty in predicting
terrorists' intentions, and the potentially catastrophic losses that could
result. Nevertheless, models have been developed that attempt to assist
insurers in evaluating terrorist and NBCR risks. However, many insurers
and other insurance experts continue to believe that there is an
insufficient basis for estimating the probable frequency of terrorist
attacks, including NBCR attacks.
Four principles generally underlie an insurance company's willingness to
provide insurance for a particular risk or type of risk. Each contributes
to the insurer's ability to measure and predict, with a reasonable degree
of accuracy, the likely frequency of occurrence and the probable severity
of losses that will result from each occurrence. In the ideal situation,
when all these factors are satisfied, the insurer can add other expenses
and profits to the expected losses and determine a price that is
appropriate to the risk. Insurers may still decide to offer insurance for
risks that deviate from the "ideal." However, as one or more of the
factors vary from the ideal, the ability of the insurer to estimate future
losses decreases, the risk increases, and the insurer's capital is more
exposed to inadequate prices for the coverage that the insurer offers.
These principles are
8Pub. L. No. 109-144, 119 Stat. 2660 (Dec. 22, 2005).
9For our description of the elements of an insurable risk, we primarily
relied on Fundamentals of Risk and Insurance. In addition, we consulted
other insurance references.
o The law of large numbers must apply. There must be a
sufficiently large number of homogeneous units exposed to random
losses, both historically and prospectively, to make the future
losses reasonably predictable. This principle works best when
there are large numbers of losses with similar characteristics
spread across a large group. For example, an automobile insurer
could analyze annual data on the frequency and severity (cost) of
accidents and the characteristics of drivers (gender or age)
involved in the accidents to predict expected losses for certain
types of drivers, and thus set premiums adequate to cover these
losses. The greater the experience with losses, the better the
insurer would be able to estimate both the frequency and the
severity of future losses, based on what happened in the past.
o The loss must be definite and measurable. The insurer must be
capable of determining whether a loss has taken place, and setting
a dollar value on the amount of the loss.
o The loss must be fortuitous or accidental. That is, the loss
must result from chance and not be something that is certain to
happen. To the extent that a future loss approaches certainty, an
insurer would have to charge the full value of the loss plus an
additional amount for the expenses incurred.
o The loss must not be catastrophic. That is, the losses should
not affect a very large percentage of an insurance company's
policyholders at the same time, for example, in a limited
geographic area. Alternatively, a catastrophic loss is one that is
extraordinarily large relative to the amount of exposure in an
insurance pool.
When applied to NBCR terrorist risks, these principles can help
explain why NBCR risks are so challenging for insurers. Most
importantly, because so few NBCR attacks have occurred, the pool
of experience in the United States is very limited, and the law of
large numbers does not help insurers to measure and predict the
frequency and severity of future losses.10 One of the reasons many
insurers we interviewed had concerns about insuring NBCR risks was
the small number of historical events that could be used as a
basis for predicting the future frequency and severity of these
risks. However, several of the academic experts we interviewed
also noted that a limited number of historical events did not
automatically make a risk uninsurable.11 For example, insurers
have covered risks related to commercial satellites for which
there has been a very limited record of losses; however, several
of the experts noted that for commercial satellites the
prospective loss is measurable and documentation is available to
assess their safeguards.
In addition to the inapplicability of the law of large numbers,
insurers also told us that they are not able to fully measure the
costs of NBCR terrorist risks (that is, the potential severity).
Because certain types of NBCR attacks could have long-term or
uncertain consequences, insurers may not be able to measure, or
even clearly identify, their prospective losses. Almost all of the
insurers we interviewed indicated uncertainties about the scope of
potential losses as a factor contributing to difficulties in
insuring NBCR risks. For example, according to America's Health
Insurance Plans (AHIP), a national trade association for health
insurers, some NBCR attacks could produce latent illnesses such as
cancer.12 The costs to health insurers would not be immediate but
would occur in the years to come. In addition, representatives of
insurers and an insurance broker with knowledge of the
property/casualty market told us that they believed the costs of
some NBCR events would be uncertain because of difficulties in
estimating how much time would pass before buildings were
successfully decontaminated (for example, after an anthrax attack)
or before anyone would even be willing to enter contaminated
locations (for example, after a nuclear attack) to assess the
damage, making the areas unusable for a long time.
Moreover, losses must be fortuitous or accidental. By definition
terrorist events, including NBCR, are deliberate and do not occur
by chance. As we previously reported, unlike storms and accidents,
terrorism involves an adversary with deliberate intent to destroy,
and the probabilities and consequences of a terrorist act are
poorly understood and difficult to predict.13 In other words, even
if an extensive history of NBCR terrorism experiences existed,
without the element of randomness, it would not necessarily be
indicative of the future frequency and severity of terrorist
events. Likewise, according to the American Academy of Actuaries
and the Insurance Information Institute, predicting terrorist
risks is particularly difficult because the attacks are not
random; they are intentional, and the attack characteristics are
not likely to be constant, as terrorists adjust their
strategies.14
Finally, insurance experts told us that NBCR risks could represent
the potential for catastrophic (severe) losses because of the
concentration of risks that could face either a particular insurer
or the industry. Most of the academic experts we interviewed
stressed that the potential for catastrophic losses, rather than
the lack of reliable data on the frequency and severity of NBCR
risks, made insurers reluctant to insure them. Several of these
experts observed that in Florida, where the risk of hurricanes is
both greater and more predictable than NBCR terrorism risks,
insurers were leaving the state because of their exposure to
catastrophic losses, perhaps more so than the unpredictability of
the risk. An NBCR event, like a natural catastrophe, could result
in catastrophic losses if it created significant losses to a high
proportion of insureds in a particular geographic area. Should
these events take place in urban areas that serve as major places
of employment, they could result in tremendous exposure for lines
of insurance providing coverage for workers, such as health or
workers' compensation.15 In addition, as explained by
representatives of the New York Department of Insurance, because
NBCR risks have the ability to cut across many lines of insurance
in a concentrated geographic area, large insurance companies that
typically cover several lines of insurance could find it very
difficult to diversify their risk portfolios. According to the
American Academy of Actuaries, the prospect of catastrophic losses
from an NBCR event could be far larger than insurers could sustain
without impairing their ability to continue providing all other
insurance coverages.16
The prospect of catastrophic risk poses additional problems
because insurers, like most businesses, generally have two major
objectives. First, they expect to make a profit for their owners.
Second, they plan to survive so as to operate in the future.
Several of the academic experts we interviewed questioned the
incentive insurers would have to insure risks, such as
catastrophic NBCR attacks, that might jeopardize their financial
soundness and profitability. If an insurer were faced with the
potential for a catastrophic loss-that is, one that threatened its
solvency or its survival-the insurer would be less likely to be
willing to provide insurance, or at a minimum, the insurer would
limit its exposure to the extent that it could. The larger and
more uncertain the estimates of projected losses, the less likely
an insurer would be willing to voluntarily insure the risk.
Moreover, insurers could have another disincentive to insuring
catastrophic risks for which they might not be adequately
capitalized-the prospect of receiving a low rating from a rating
agency. We interviewed representatives from three rating agencies,
two of whom said they generally viewed NBCR risks as not insurable
because of their potential for catastrophic losses.17 For example,
a representative from one credit rating agency said that if his
company considered existing potential exposure to NBCR risks when
analyzing commercial property/casualty insurers, they might have
to downgrade ratings due to the magnitude of potential losses.
Because the frequency and severity of NBCR risks are difficult to
measure, insurers have turned to techniques and processes that
they have applied to other catastrophic risks. As we previously
reported, insurers have come to rely on computer models and
modeling firms to assist them in estimating the frequency and
severity of catastrophic events and the probable losses that they
might face.18 Since Hurricane Andrew in 1992, insurers have
recognized the challenges associated with insuring low-frequency,
high-cost risks such as natural disasters and increasingly have
turned to the use of computer models to better estimate the
expected frequency and severity of the risks. After September 11,
the owners of these models developed them to estimate the effects
of man-made, or terrorist, events as well. However, as noted by
the Insurance Information Institute and other insurance experts,
estimating the incidence of terrorism is fundamentally different
and vastly more difficult than forecasting natural catastrophes,
where insurers can learn much about the frequency and severity of
events through historical claim data, meteorological and
geological records, and increases in scientific knowledge.19
In view of the limited history of NBCR attacks in the United
States, representatives of the modeling firms reported to us that
they generally have relied on panels of terrorism experts to
assess threats posed by terrorists. While these experts do not
have access to current classified data, they use their judgment
and expertise to assess the probability (that is, the future
occurrence or frequency) of future terrorist attacks. For example,
the experts assess the likelihood of terrorists targeting urban
areas, based on population density and perceived importance, as
well as well-known buildings within those areas. Moreover, the
experts also consider the level of difficulty of using weapons of
different sizes and capacities as a way of estimating the
potential severity of terrorist attacks. The modeling firm
representatives reported that they use a number of statistical
techniques to convert the subjective opinions of their experts and
the characteristics of NBCR weapons into quantified estimates of
the frequency and severity of potential losses. While we did not
assess the capabilities of these models, we have noted in a
previous report that some federal agencies, even with access to
classified data, have difficulty including in their risk
assessments the relative probability of various terrorist threat
scenarios.20 Representatives of insurers and insurance brokers
also said that they generally had little confidence in the ability
of models to estimate the frequency of future terrorist attacks,
and the American Academy of Actuaries noted that while there has
been some development of terrorism models since September 11,
quantification of terrorism exposure still was extremely
difficult.21 The Academy also noted that the probabilities
associated with the occurrence of a terrorist attack have remained
somewhat judgmental and a key source of uncertainty.
Representatives of insurers told us that the models can be useful
in simulating scenarios for particular NBCR attacks in specified
locations, allowing them to estimate the potential severity of
possible losses for specific events. Using available engineering,
scientific, and demographic research, the models can estimate
insured potential losses for the portfolios of individual
insurers. Several insurers and brokers said that they found
models, including those that they may have created themselves,
useful in managing insurers' exposure to terrorism risks.
Finally, insurance experts and representatives of insurers and
reinsurers we interviewed agreed that difficulties in predicting
NBCR events, as well as the prospect for catastrophic losses, make
these risks difficult to insure.22 However, as noted by several of
the experts from academia, even though a risk may not satisfy all
the principles of insurability, insureds may be able to find some
amount of coverage. Several experts noted that insurability is not
simply an issue of extremes-that is, either insurable or
uninsurable. Rather, as specifically noted by one, the
insurability of events should be viewed as a continuum, with some
events such as NBCR being on the extreme end of the continuum.
Insurers� Exposure to NBCR Risks Varies Widely by Line of Insurance,
and Insurers Offering Coverage Face Challenges in Pricing
Insurers' exposure to NBCR risks varies widely by line of
insurance, and insurers offering coverage face challenges in
pricing. In view of the underlying difficulties in insuring NBCR
risks, property/casualty insurers generally have tried to exclude
such events from their coverage. However, for reasons that vary
somewhat by line of insurance, workers' compensation, life, and
health insurers generally offer coverage for NBCR events.
Insurance industry representatives told us that most
property/casualty insurers have used long-standing policy
exclusions to limit coverage of NBCR events, although experience
with these types of exclusions suggests that they could be
challenged in court. Representatives of property/casualty insurers
said that these risks continue to be unattractive to insure
because of difficulties in predicting the frequency and severity
of these risks, the potential for large and uncertain losses, and
the limited amount of private reinsurance. Despite similar
concerns and subsequent difficulties in setting prices due to lack
of reliable historical data, coverage for workers' compensation,
life, and health insurance generally is available on the market.
In large part, insurers provide this coverage, particularly
workers' compensation, because they are required to by states, or
because the coverage (for example, life insurance) does not
readily lend itself to excluding one type of risk. Nevertheless,
insurance and state regulatory officials expressed particular
concerns about whether the prices set for workers' compensation
insurance would cover potential losses, should a major NBCR event
occur. Representatives of life and health insurers told us that
generally their prices did not reflect their potential exposure to
NBCR risks.
Relatively Little NBCR Coverage Available in Property/Casualty Market
Because Most Insurers Remain Unwilling to Cover Risks
Unlike workers' compensation, life, and health insurers, insurers
selling property/casualty insurance largely have excluded NBCR
risks from their policies. Since Congress passed TRIA, the supply
of commercial property/casualty insurance for conventional
terrorism appears to have increased, yet insurance policies
covering NBCR risks have remained in short supply. In its most
recent survey of terrorism insurance in the commercial
property/casualty industry, Treasury found that the percentage of
insurers that reported that they wrote some coverage for terrorism
using conventional weapons (that is, not NBCR) increased from 73
percent in 2002 to 91 percent in 2003 and 2004.23 In contrast, the
percentage of insurers that reported covering NBCR risks in some
of their policies remained about the same during that general
period and was significantly smaller-about 35 percent.24 Moreover,
as explained by Treasury officials, the 35 percent represented
insurers that offered any kind of coverage for NBCR risks, meaning
that an insurer would be counted as offering NBCR coverage even if
it offered only one policy for one type of NBCR risk.
Representatives of insurance and insurance brokerage companies
also told us there was a very limited supply of NBCR coverage in
the commercial property/casualty marketplace. Representatives of
the three largest brokerage firms that find property/casualty
insurance coverage for large commercial businesses told us that
insurers offering terrorism coverage exclude NBCR risks. According
to representatives of insurers, exclusions for NBCR risks are
contained in policies offered by commercial property/casualty
insurers underwriting in regulated insurance markets and also are
contained in stand-alone terrorism insurance policies offered by
specialty insurers in the nonregulated market.25 A representative
of one of the specialty insurers with whom we spoke said the
company offered very limited amounts of NBCR coverage, typically
for one or two of the risks. For example, this company would offer
$10 million of biological and chemical coverage for certain
commercial properties, but the insurer would not provide coverage
above that threshold.
Representatives of insurance and insurance brokerage companies we
interviewed said that even though TRIA would cover NBCR losses
incurred by an insurer the same as it would any other covered
terrorist losses, little coverage for NBCR risks was available
because commercial property/casualty carriers largely viewed NBCR
risks as uninsurable. According to representatives of two large
commercial property/casualty insurers, both of whom underwrote
insurance in states with localities considered at higher risk for
a terrorist attack, the current structure of TRIA offered little
incentive to cover NBCR losses, even though TRIA would provide
coverage for some insured NBCR events. For example, they said that
because their companies offered workers' compensation insurance in
areas at higher risk for terrorism, the companies were less likely
to increase their level of exposure to NBCR events by also
offering NBCR coverage in their commercial property and general
liability policies.26 Under TRIA, the more business an insurer
writes, the larger its deductible; and the more lines of insurance
an insurer writes, the more it is exposed to losses from a
catastrophic event.27 In addition, because of uncertainties
surrounding the frequency and severity of NBCR events as well as
the enormity of potential losses, representatives of insurers we
interviewed said that they would have difficulty setting prices to
cover such losses, even using information from the modeling firms.
These representatives also expressed concerns about the potential
insured losses of an NBCR event being largely undeterminable for
many years after the event occurred. Such an event could have many
long-term consequences-for example, the extent and duration of
remediation for a contaminated building, the resulting business
interruption to the policyholder, and any related litigation
involved.28 Finally, as confirmed by representatives of the
Reinsurance Association of America, private reinsurance-the
risk-spreading mechanism that insurers typically use to reduce
their potential losses-provided very limited amounts of coverage
for NBCR risks in the property/casualty market.
Although Property/Casualty Insurers Remove Coverage for NBCR
Events through Exclusions, They Could Be Challenged
Property/casualty insurers long have sought to limit their
exposure to certain perils, such as flood, that they consider
uninsurable. Property/casualty insurers have written exclusions
related to nuclear hazard risk into their standard policies for
decades, generally to protect themselves from losses related to
nuclear power plant accidents. Representatives of insurance
companies and brokerage firms agreed that existing nuclear hazard
exclusions were broad enough to likely exclude any losses
resulting from nuclear and radiological events, including a
terrorist attack.29
According to these same insurance industry representatives,
property/casualty insurance contracts issued prior to September 11
did not specifically include references to losses from the
terrorist release of biological and chemical agents.30 Rather,
Insurance Services Office (ISO) officials told us that the
standard contracts they provided for industry use contained
language that excluded coverage for losses caused by pollution and
contamination. For instance, the pollution exclusion was developed
to exclude coverage for the release of many different types of
substances-from asbestos to pesticides-that could cause harm to
people and the environment. Representatives of some of the
insurers we interviewed believed that their pollution and
contamination exclusions also might allow property/casualty
insurers to exclude losses caused by biological and chemical
agents released by a terrorist. However, representatives of one
insurance broker we interviewed suggested that pollution and
contamination exclusions could be challenged in the courts if a
biological or chemical event were to occur. Courts determine
whether a particular substance is or is not a pollutant based
upon, among other things, the language in the policy, the facts
and circumstances of the case, and the law of the jurisdiction. As
a result, the language of the standard pollution exclusion might
be susceptible to broad interpretation by the courts. In other
words, some uncertainty exists, even in the insurance industry,
about how effectively the pollution and contamination exclusions
would protect insurers against losses from a NBCR terrorist
attack.
In addition to disputes over the exclusion of NBCR risks in
policies, there are other situations where the extent of
property/casualty insurers' coverage of such events could depend
on judicial or other determinations.
o Cause of loss. According to standard nuclear exclusions,
commercial policies would not cover damage caused by a nuclear
blast. However, regardless of any exclusions, according to
information provided by NAIC, approximately 16 states (including
New York) require property/casualty insurers to cover losses from
a "fire following" an event, irrespective of the cause of fire.31
A national security expert told us that in the case of a nuclear
bomb detonation, once the property was destroyed, insurers could
dispute the extent to which fire (covered in fire following
states) or the blast (excluded by the nuclear exclusion) caused
the damage. In other contexts, disputes over the cause of loss
often have been litigated. For example, many homeowners who
suffered losses in Hurricane Katrina have filed lawsuits
challenging property/casualty insurers' determinations about the
cause of their losses.32
o Certified as a terrorist act. The Congressional Budget Office
(CBO) has suggested that some NBCR events might not be readily
identified as terrorist acts, as defined by TRIA, and therefore
coverage-both for insurers and for their policyholders-would be
unclear.33 For example, the persons or person who in 2001 mailed
letters contaminated with anthrax that killed several people and
sickened many more remain(s) unknown.34 However, should TRIA not
be renewed in 2007, this particular determination would not apply.
In addition, homeowners' insurers, part of the personal
property/casualty market, have long-standing exclusions in their
policies, similar to the exclusions contained in commercial
property/casualty policies. According to representatives of two
large homeowners' insurers, the exclusions limited their exposure
to NBCR risks. While these representatives also told us they have
not excluded conventional terrorist events from their policies,
they said their companies generally manage their exposure to any
terrorism risks by diversifying their portfolios.
Demand for NBCR Coverage in Property/Casualty Market Is Difficult
to Determine
The 2005 Treasury study reported that less than 3 percent of
policyholders from a range of industries reported purchasing NBCR
coverage in their commercial property/casualty insurance
policies.35 Further, although purchase rates for NBCR insurance do
not necessarily reflect overall demand, a major reason for not
purchasing NBCR insurance given by the survey respondents was that
they did not believe they were at risk for an NBCR event. While
the Treasury study did not break down purchase rates for NBCR
insurance by industry sector, another study of the market for
terrorism insurance conducted by insurance brokers found that
companies in the real estate, financial, and health care sectors
had the highest rates for purchasing terrorism insurance.36
Although the brokerage firm study does not specifically address
the demand for NBCR insurance, we consider demand for terrorism
insurance generally to be a reasonable approximation of where
demand for NBCR insurance might exist. For instance, demand for
terrorism insurance may be strong in the real estate sector
because terrorism coverage typically is required as part of a
commercial business loan transaction, according to the Mortgage
Bankers Association. However, representatives of the Mortgage
Bankers Association also said lenders generally do not require
NBCR coverage, because little or no coverage is available. In
addition, a few of the academic experts we interviewed suggested
that some individuals and businesses might not purchase NBCR
coverage under the assumption that the federal government would
cover losses from an NBCR attack, as the government agreed to do
for some personal and commercial property losses resulting from
Hurricane Katrina.
However, several risk managers we interviewed from the hospitality
and transportation industries, as well as commercial property
owners, all reported a willingness to buy NBCR coverage in the
private market. These managers expressed frustration at not being
able to purchase insurance for NBCR risks, which they said they
could do little to prevent or mitigate, particularly because an
NBCR attack would be an intentional act. One of the risk managers
that we interviewed noted that his company could not find enough
NBCR coverage for even one building, so the company used a captive
to self-insure against NBCR risks.37
Insurers in Workers� Compensation, Life, and Health Generally Cover
NBCR Risks, but Prices May Not Take Account of Potential Losses
Should an NBCR event occur, workers' compensation, life, and
health insurers would be responsible for covering loss of life and
medical treatment for injuries because they generally provide
coverage for these events. Following September 11, NAIC issued
guidance stating its member state regulators believed terrorism
exclusions were "not necessary" or were "inappropriate" for
workers' compensation, life, and health insurance policies, with
exceptions limited to cases where insurers could demonstrate they
would become insolvent from offering the coverage.38 According to
an NAIC representative, regulators did not perceive exclusions as
necessary because they presumed these insurers were diversifying
their risks in these lines by insuring individuals across the
country.
Workers� Compensation Insurance Generally Covers All Perils,
Including NBCR Risks, but Pricing Challenges Exist
Workers' compensation insurers must cover losses from NBCR events
that occur at the workplace, including related illnesses and
injuries. According to multiple sources, applicable state laws
generally require workers' compensation insurers to cover nearly
all perils, including those from NBCR risks.39 In addition,
according to representatives of the National Council on
Compensation Insurance (NCCI), an organization that prepares
insurance rate (price) recommendations for workers' compensation,
under state workers' compensation laws, employers are responsible
for covering unlimited medical costs and a portion of lost
earnings for injuries or illnesses that occur during the course of
employment, regardless of the cause.40
While workers' compensation insurers generally are not permitted
to exclude any perils from coverage, insurer representatives
advised us that any surcharges they may be permitted to charge for
NBCR exposure likely would not cover potential losses. According
to NCCI representatives, recognizing that workers' compensation
insurers have exposure to terrorism losses, at least 36 states,
including the District of Columbia, have allowed workers'
compensation insurers to file rates that include an additional
surcharge (an average of 2 cents per $100 of employee payroll) for
terrorism risk.41 NCCI developed this statewide surcharge based on
the results of a model, as a way for insurers that underwrite in
states that belong to NCCI to cover potential losses from
terrorism, including those from NBCR weapons. While
representatives of NCCI were reasonably satisfied that the
surcharges were actuarially sound, in the District of
Columbia-where insurers may file the NCCI-developed terrorism
surcharge-regulators did not believe that the surcharge was
actuarially sound because of assumptions made in the model about
localities designated to be at higher risk for terrorist events.
Moreover, the willingness of state regulators that do not
participate in NCCI to approve terrorism surcharges in workers'
compensation may vary. For example, we obtained information from
two large states that do not participate in NCCI and have
geographic areas considered at higher risk for terrorism-New York
and California. In New York, regulators have allowed workers'
compensation insurers to file an additional surcharge for
terrorism. However, representatives of the New York Compensation
Insurance Rating Board (Rating Board) told us that the terrorism
surcharge the Rating Board developed does not distinguish between
conventional and NBCR risks.42 They did not believe that the
Rating Board could justify a higher surcharge to cover NBCR risks
because of the limited historical data on NBCR attacks and
further, if the Rating Board did, the cost would be so high that
businesses would probably find it unaffordable. In contrast,
California regulators have not permitted insurers to file rates
with additional surcharges specifically for terrorism, including
NBCR risks. California regulatory officials told us that they
would reject any terrorist or NBCR risk surcharges because they
thought such rate justifications were not based on recognized
actuarial methods.43
Representatives of workers' compensation insurers we interviewed
said that factors unique to workers' compensation also made it
difficult for them to cover NBCR risks. First, as they explained,
unlike some other lines of insurance, workers' compensation
insurance covers losses beyond the expiration date of the policy.
The representatives told us their most expensive claims typically
came from workers who were disabled from illness or injury because
they were entitled to lost wages as well as medical expenses. For
NBCR events, quantifying medical expenses could be especially
challenging because some illnesses or disabilities might not
manifest until much later or could be difficult to trace to a
workplace occurrence.44 For example, representatives of workers'
compensation insurers told us that in the case of smallpox, it
might be difficult to determine whether the worker contracted the
illness at work or elsewhere.45 In addition, these representatives
told us that they may be further constrained in their ability to
adjust their price for specific geographic risks. Representatives
of NCCI told us that terrorism surcharges must be applied equally
throughout a state, thus the terrorism surcharge did not reflect
that employers in certain areas, such as urban areas where
employees might be more concentrated, had a greater exposure to
terrorist events.46
Despite the exposure of workers' compensation insurers to NBCR
risks, representatives of private market insurers and two public
insurance funds told us that the availability of private
reinsurance for these risks was limited.47 Therefore, they
explained that they largely would rely on TRIA to cover NBCR
risks. As representatives of the private insurers explained, many
of their private-market reinsurance policies specifically excluded
NBCR risks, or to the extent coverage was available, reinsurers
offered it at prices they could not afford. Representatives of the
New York State Insurance Fund told us that they had not purchased
reinsurance because they viewed the high costs of reinsurance for
their market as unaffordable. As a result, should a large NBCR
attack occur, these representatives said that their fund might
have to turn to the state to help pay claims. In contrast,
representatives of the California State Compensation Insurance
Fund said that they were willing to pay higher prices based on
available capacity for reinsurance for NBCR risks.
According to Life Insurers, They Generally Cannot Exclude Terrorism
Coverage Including NBCR Risks
The American Council of Life Insurers officials, as well as
representatives of life insurers we interviewed, told us they
believed that most states do not allow for terrorism or NBCR
exclusions in life insurance policies.48 In two of the states
specifically included in our review-New York and California-state
insurance law and implementing regulatory policy prohibited both
individual and group life insurance policies from excluding NBCR
or other terrorism events.49 On the other hand, regulatory
officials from the third jurisdiction we included in our review,
the District of Columbia, told us that they did not have any legal
requirements that life insurers cover NBCR events and that several
group life insurers recently filed policies with exclusions for
NBCR risks.
While group life insurers have exposure to NBCR risks,
representatives of group life insurers that provide coverage
nationwide told us that charging higher rates to insureds at
potentially greater risk for an NBCR event would be difficult.
This is because of the way the insurers typically price coverage
and their inability to determine which employers would be at
greater risk for an NBCR event. Life insurers price their products
based on mortality tables derived from experience with prior
insurance contracts and calibrated for the effects of certain
individual characteristics such as a smoking habit, or group
characteristics such as occupation type. However, representatives
of life insurers said that these tables do not take into account a
greater number of deaths that could occur as a result of a
terrorist or NBCR act.50 Furthermore, these representatives told
us that they have difficulty determining whether a particular
employer or group would be more or less at risk for death from an
NBCR event because they traditionally have not tracked the
geographic locations of individuals covered by their policies.
However, whether losses from a large NBCR attack would be
catastrophic for life insurers was unclear and could depend on the
extent to which their portfolios were diversified. Representatives
of national life insurers told us that they have a broad portfolio
of exposure nationwide, which helps them diversify their risks. In
the event of a large NBCR attack in which up to one million
insured people died, representatives of the American Council of
Life Insurers told us that most large life insurers probably would
be able to pay the death claims. However, these representatives
also said that small or medium-size group life insurers that
received a significantly high number of death claims following an
NBCR attack might be unable to pay claims and become insolvent,
and that state guarantee funds would have to levy an assessment on
the remaining insurers in the states to pay the claims.51
Notwithstanding their belief that they could survive an NBCR
attack, representatives of the two national insurers we
interviewed were concerned about the companies' exposure to
catastrophic NBCR losses. These representatives particularly were
concerned because their companies generally insure all the
employees of a given company. These employees could be
concentrated in one geographic location, and the insurance
companies could be liable for huge losses if an NBCR event led to
widespread casualties in one area.52
In addition, life insurers do not have access to TRIA.
Representatives of two group life insurers we interviewed said
that their companies either had not found reinsurance for NBCR
risks or the costs were very high relative to the amount of
insurance that could be purchased. We also spoke with
representatives of a large group life reinsurer who said their
company provided some coverage for NBCR events, although the
company limited this exposure to $100 million per event.
According to Health Insurers, They Face Unique Challenges in
Determining Exposure to NBCR Risks
Although many health insurers cover groups of individuals
concentrated geographically, representatives of AHIP and two
national group health insurers told us that determining overall
exposure to NBCR risks was challenging. Further, they explained
that state regulation of NBCR coverage was not the primary reason
they covered terrorism risks, and AHIP could not provide us
documentation of regulatory requirements for NBCR coverage.
Nevertheless, insurance regulatory officials from two states with
localities at higher exposure to terrorism risks-California and
New York-told us they have not allowed health insurance policies
to exclude medical expenses related to illness or injury sustained
from an NBCR event.53 In contrast, regulatory officials in the
District of Columbia told us that they did not have any
requirements that health insurers cover NBCR events.
Representatives of two national group health insurers we
interviewed described the difficulties they would have in
attempting to set actuarially sound prices for health risks from
NBCR terrorist events. First, representatives of health insurers
said that they typically price health coverage based on experience
with their insured populations and without knowing the likely
impact of NBCR risks, they could not develop actuarially sound
prices for such a risk. Further, the representatives explained
they tend to limit policy coverage by procedure or by individual,
rather than by the source of the illness. For example, a
representative of one health insurer told us that while the
company did develop prices for other low-frequency, high-cost
claims such as liver transplants, they could only do so because of
prior experiences. Second, uncertainties over the long-term health
effects of NBCR attacks, such as the need for psychological
counseling or cancer treatment, make it difficult for insurers
either to exclude NBCR attacks from their coverage or charge
additional prices for their coverage. A report from the American
Academy of Actuaries, as well as representatives from AHIP, noted
that harm from NBCR events could be widespread and persist for
years, and in the years subsequent to the attack, it would be
difficult to identify the source of the illness.54 According to
representatives of one insurer, this also would make direct
attribution of an expense to an NBCR attack difficult.55 Further,
these representatives said that the ultimate costs of medical
treatment would be unknown, as some factors such as whether
hospitals would remain open and sufficient vaccines would be
available, were controlled by local public health responders.56
Finally, similar to life insurance, representatives of one health
insurer told us they often lack information about the specific
geographic locations of their insured populations, further
limiting their ability to conduct risk-based pricing for events
such as NBCR attacks.
Representatives of the health insurance industry told us private
reinsurance for their coverage of catastrophic events generally
was very limited. AHIP representatives told us that catastrophic
reinsurance for health insurers was in short supply, expensive,
and generally focused on covering large costs incurred by
individuals, rather than large costs incurred by groups of
individuals potentially exposed to the same risks. Representatives
from health insurers also said that reinsurance was costly, but
they had not specifically sought out coverage for NBCR risks. As
is the case for life insurers, health insurers do not have access
to TRIA.
As agreed with your office, unless you publicly announce the
contents of this report earlier, we plan no further distribution
until 30 days from the report date. At that time, we will send
copies to the Ranking Minority Member of the House Financial
Services Committee, other interested members of Congress, and
NAIC. We also will make copies available to others upon request.
In addition, this report will be available at no charge on GAO's
Web site at http://www.gao.gov.
If you or your staff have any questions on this report, please
contact me at 202-512-8678 or [email protected]. Contact points
for our Offices of Congressional Relations and Public Affairs may
be found on the last page of this report. GAO staff who made major
contributions to this report are listed in appendix II.
Sincerely yours,
Orice M. Williams Director, Financial Markets and Community
Investment
Appendix I: Objectives, Scope, and Methodology
Our objectives were to discuss (1) commonly accepted principles of
insurability and whether nuclear, biological, chemical, and
radiological (NBCR) risks are measurable and predictable and (2)
whether private insurers currently are exposed to NBCR risks and
the challenges they face in pricing such risks. As part of our
review, we conducted interviews in California, New Jersey, New
York, Massachusetts, and Washington, D.C. We conducted our review
from February 2006 through September 2006 in accordance with
generally accepted government auditing standards.
Principles of Insurability and Assessing Whether NBCR Risks Are
Measurable and Predictable
To identify commonly accepted principles of insurability and
whether NBCR risks are measurable and predictable, we reviewed
standard insurance references to identify principles that underlie
insurers' evaluations of the insurability of risks. We primarily
relied upon Fundamentals of Risk and Insurance, but consulted
additional references for consistency of explanation.1 To
determine the insurability of NBCR risks, we applied these
principles based on information we collected about the market for,
and nature of, NBCR terrorism risks. To enhance our understanding
of the market for NBCR insurance, and factors that insurers might
consider when deciding whether to offer this insurance, we
consulted insurance experts, including the American Academy of
Actuaries, the Insurance Information Institute, and insurance
experts from academia, and a crosssection of insurers representing
different lines of insurance.
Moreover, we obtained information about how NBCR terrorist risks
are measured and predicted from three firms that specialize in
modeling terrorism and other catastrophic events for insurers
(modeling firms).2 We chose these three firms because they are
among the best known in the insurance industry. Representatives of
these firms provided us with and identified the types of
information they incorporate into their computer models, the
methods that they use to estimate the potential frequency and
severity of terrorist attacks with NBCR weapons, and the reasons
they believe their products are of assistance to the insurance
industry. We did not evaluate the ability of the models to predict
the frequency and severity of NBCR or other catastrophic risks.
For additional perspective, we also obtained descriptions of the
types of data available to model insured losses from natural
disasters, such as hurricanes, from a modeling firm and
presentations made at a catastrophe modeling conference.3
Finally, to obtain a broad understanding of the characteristics of
NBCR weapons and the types of damage they could cause, we
consulted several sources of information. We interviewed
representatives from RAND, a nonprofit research organization with
a focus on national security issues, and reviewed RAND
publications. In addition, we interviewed representatives of the
U.S. Department of Homeland Security and reviewed reports. In
addition, to identify the characteristics of biological, chemical,
and radiological weapons, we used information from our own
reports.
Assessing Exposure to NBCR Risks
To assess whether insurers are exposed to NBCR events, we
identified lines of insurance that could be affected in the event
of an NBCR terrorist attack: life, health, workers' compensation,
commercial property/casualty, and homeowners insurance. Our
information about insurer exposure in each of these lines came
from multiple sources.
For an overview of the market nationwide, we interviewed
representatives of three of the largest commercial insurance
brokers and national insurance trade organizations-the American
Council of Life Insurers, representing life insurers; America's
Health Insurance Plans, representing health insurers; the Property
Casualty Insurance Association of America, representing
property/casualty insurers; the Reinsurance Association of
America, representing reinsurance companies; and the Association
of Bermuda Insurers and Reinsurers, representing off-shore
specialty insurers and reinsurers. In addition, we interviewed
representatives from Independent Insurance Agents and Brokers of
America, an association of independent insurance agents and
insurance brokers nationwide. Information from these trade
associations helped provide a broader context for information we
obtained from individual insurers and reinsurers and gave us some
perspective on exposure for small and medium-sized insurers,
insurers that we did not interview.
To obtain information on specific insurers' exposure to NBCR
risks, we interviewed knowledgeable representatives of a total of
12 insurers, writing either one or several lines of insurance
addressed by our study. Although the time frames of our report
only permitted us to obtain information from selected insurers, we
believe that these insurers were knowledgeable based on their
broad exposure for their respective lines of insurance nationwide
and their knowledge of markets at higher risk for terrorism. To
select insurers to interview, we obtained 2004 market share data
based on direct written premiums from the Insurance Information
Institute and Moody's, the most recent available data at the time
of our review.4
Seven of the insurers we interviewed that provide coverage in the
property/casualty, workers' compensation, life, and health
insurance lines held a significant portion of the insurance
industry's market share nationwide. In addition, we interviewed
the state workers' compensation insurance funds for New York and
California, which serve as insurers of last resort for employers
that cannot find workers' compensation coverage in the private
market. Collectively, the private insurers and state funds held
the following shares of the markets, by line of insurance:
o 16 percent of the commercial property/casualty insurance
market,
o 34 percent of the homeowners insurance market,
o 38 percent of the workers' compensation insurance market,
o 18 percent of the life insurance market, and
o 13 percent of the health insurance market.5
In addition, market shares for the private market insurers were
among the highest in six states with localities considered by the
Insurance Services Office (ISO)-a national organization that
prepares insurance rate (price) recommendations and related
policies for property/casualty insurers-to be at higher risk for
terrorist events (including NBCR events). These insurers usually
numbered among the top five insurance providers for their
respective lines of insurance in these six states. Depending on
the competitiveness of the state market for each insurance line,
this market share generally represented anywhere from 2 to 30
percent of the local market. For commercial property/casualty
insurance, we also interviewed three specialty insurers,
recommended to us by insurance brokers. Specialty insurers are not
regulated by state insurance departments but provide stand-alone
terrorism insurance coverage that may or may not include NBCR
risks.
Finally, to learn more about the availability of NBCR reinsurance
coverage, we interviewed representatives of three reinsurers that
provide insurance for insurers in the commercial property/casualty
market and the group life market, including one reinsurer that
focuses its coverage on specific risks such as NBCR events. Two of
the reinsurers, as measured by revenue, are among the top three
reinsurers in the United States.
To identify state requirements regarding NBCR coverage, we met
with and received documentation from the National Association of
Insurance Commissioners (NAIC) for a national regulatory
perspective as well as insurance regulators in California, New
York, and the District of Columbia for individual states'
regulations. We selected these states and the District of Columbia
because they were among the jurisdictions that have localities
considered at high risk for terrorist attacks. Representatives of
NAIC were able to provide us with all of the states' legal
requirements for property/casualty insurers' coverage of fire
following events; however, NAIC did not collect information that
would allow us to determine a state's requirements for coverage of
NBCR events in workers' compensation, life, and health insurance.
State regulators in California, New York, and the District of
Columbia provided us with information about their requirements for
NBCR coverage for life and health policies issued in their
respective states. We gathered information on state workers'
compensation requirements for providing NBCR coverage and for
pricing this coverage from the National Council on Compensation
Insurance-representing 34 states including the District of
Columbia-and from workers' compensation rating boards and
researchers in New York and California. In the time frames of our
study, we could not review all of the state requirements for each
of the lines of insurance included in our study. Therefore, for
circumstances in which NAIC could not provide us specific state
requirements, we relied on national trade associations or
information provided by national insurance carriers, particularly
for requirements for life and health insurance.
To learn about permissible policy exclusions, we met with ISO and
reviewed their standard policies (forms) for commercial property,
general liability, and homeowners insurance, including terrorism
endorsements. While individual insurer's use of these forms may
vary, ISO's forms contain standard policy language. We identified
language in these policies that could address issues related to
NBCR events, including the nuclear hazard exclusion and the
pollution exclusion. We also obtained information about factors
that could affect the interpretation of ISO forms from insurers
and insurance brokers. In addition, we identified examples of
court cases involving disputes over language pertaining to the
pollution exclusion in insurance contracts.
Interviews with insurance experts and representatives of three
major rating agencies provided additional perspective on insurer
willingness to offer NBCR coverage. We selected insurance experts
from academia based on their knowledge of insuring for
catastrophes, including terrorist acts. We met with
representatives of three rating agencies that provide ratings on
insurers' financial strength and abilities to meet ongoing
obligations to policyholders.
To learn more about supply and demand for NBCR insurance in the
commercial property/casualty industry, we reviewed the U.S.
Department of the Treasury's (Treasury) 2005 "Report to Congress,
Assessment: The Terrorism Risk Insurance Act of 2002" and
discussed the findings with Treasury staff responsible for its
contents. In this report, Treasury reports on results from a
series of surveys of commercial property/casualty insurers and
policyholders. One survey asked insurers whether they wrote
coverage for terrorism risks and whether they wrote any policies
that included coverage for any one of the NCBR risks. Another
survey asked policyholders from a range of industries whether they
purchased NBCR terrorism risk coverage and if not, asked them to
identify the reasons. We were limited in our ability to use
policyholders' reported purchase rates for NBCR coverage as a
signal for approximating overall demand because of the low
response rates to these questions. Because a number of surveyed
policyholders did not provide this information, there is a risk
that those who did not respond differed from those who did, which
could lead to bias in the survey results.
To supplement Treasury's data on demand for NBCR coverage in the
commercial property/casualty insurance market, we reviewed surveys
of the terrorism insurance market conducted by Marsh-a large
insurance broker-in 2005 and 2006 as well as by Moody's, a rating
agency, in 2005.6 We also interviewed three risk managers from
large companies who purchase commercial property/casualty
insurance policies in the real estate, hospitality, and
transportation industries, and interviewed representatives of two
national associations representing a range of consumers and
commercial businesses. The information from both the surveys and
the interviews about the availability of NBCR coverage is limited
to the specific brokerage clients and individual companies, and
cannot be generalized to all policyholders in the United States.
Nonresponse rates and other sources of potential error also may
limit the use of data from these two surveys.
Appendix II: GAO Contact and Staff Acknowledgments
GAO Contact
Orice M. Williams, (202) 512-8678 or [email protected]
Staff Acknowledgments
Lawrence D. Cluff was the Assistant Director. In addition, Joseph
A. Applebaum, Sonja J. Bensen, Katherine C. Bittinger, Carl
Ramirez, Linda Rego, Barbara M. Roesmann, and Elizabeth Walat made
key contributions to this report.
Related GAO Products
Insurance Sector Preparedness: Insurers Appear Prepared to Recover
Critical Operations Following Potential Terrorist Attacks, but
Some Issues Warrant Further Review. GAO-06-85 . Washington, D.C.:
November 18, 2005.
Catastrophe Risk: U.S. and European Approaches to Insure Natural
Catastrophe and Terrorism Risks. GAO-05-199 . Washington, D.C.:
February 28, 2005.
Terrorism Insurance: Effects of the Terrorism Risk Insurance Act
of 2002. GAO-04-806T . Washington, D.C.: May 18, 2004.
Terrorism Insurance: Effects of the Terrorism Risk Insurance Act
of 2002. GAO-04-720T . Washington, D.C.: April 28, 2004.
Terrorism Insurance: Implementation of the Terrorism Risk
Insurance Act of 2002. GAO-04-307 . Washington, D.C.: April 23,
2004.
Catastrophe Insurance Risks: Status of Efforts to Securitize
Natural Catastrophe and Terrorism Risk. GAO-03-1033 . Washington,
D.C.: September 24, 2003.
Catastrophe Insurance Risks: The Role of Risk-Linked Securities
and Factors Affecting Their Use. GAO-02-941 . Washington, D.C.:
September 24, 2002.
Terrorism Insurance: Rising Uninsured Exposure to Attacks
Heightens Potential Economic Vulnerabilities. GAO-02-472T .
Washington, D.C.: February 27, 2002.
Terrorism Insurance: Alternative Programs for Protecting Insurance
Consumers. GAO-02-199T . Washington, D.C.: October 24, 2001.
Terrorism Insurance: Alternative Programs for Protecting Insurance
Consumers. GAO-02-175T . Washington, D.C.: October 24, 2001.
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10As described in GAO, U.S. Postal Service: Better Guidance Is Needed to
Ensure an Appropriate Response to Anthrax Contamination, GAO-04-239
(Washington, D.C.: Sept. 9, 2004), the first cases of bioterrorism anthrax
in the United States occurred in September and October 2001, when at least
four letters containing anthrax spores were mailed to news media personnel
and two U.S. Senators. In addition, as indicated in Combating Terrorism:
Need for Comprehensive Threat and Risk Assessments of Chemical and
Biological Attacks, GAO/NSIAD-99-163 (Washington, D.C.: Sept. 14, 1999), a
limited number of incidents involving biological agents, including the
contamination of salad bars in local restaurants with salmonella poisoning
by the Rajneeshee religious cult, have occurred in the United States.
11We contacted insurance experts from academia, including the University
of California (Berkeley), Drake University, University of Pennsylvania,
Santa Clara University, Georgia State University, as well as the American
Academy of Actuaries, and RAND (with expertise in both insurance and
national security).
12AHIP, July 3, 2003, letter to Office of Microeconomic Analysis, U.S.
Department of the Treasury (Treasury).
13GAO, Risk Management: Further Refinements Needed to Assess Risks and
Prioritize Protective Measures at Ports and Other Critical Infrastructure
GAO-06-91 (Washington, D.C.: Dec. 15, 2005).
14American Academy of Actuaries, April 21, 2006, letter to the President's
Working Group on Financial Markets; public comment record, U.S. Department
of the Treasury; and Insurance Information Institute, Terrorism Insurance
and the United States Government (New York, New York: September 2004). In
addition, the Congressional Budget Office (CBO) also noted that terrorism
models are hampered not only by a lack of data but also by the absence of
an established "theory" of terrorist attacks. CBO, Federal Terrorism
Reinsurance: An Update (Washington, D.C.: January 2005).
15Congressional Research Service, Terrorism: The New Occupational Hazard,
Order Code RL31387 (Washington, D.C.: Jul. 23, 2002). As noted in this
report, most of the direct victims of terrorism in the United States in
recent years have been people at work, whether those in the World Trade
Center or the Pentagon, or victims of anthrax transmitted through the
mail.
16Statement by American Academy of Actuaries' TRIA Subgroup on Extending
or Replacing the Terrorism Risk Insurance Act of 2002, December 1, 2005.
The Academy presented this conclusion-that the insurance industry would be
impaired by an NBCR attack-based on the assumption that TRIA would be
allowed to expire.
17While rating agency representatives reported that their agencies have
considered the exposure of commercial property/casualty insurers to
terrorism generally, none reported that their agencies specifically
analyzed exposure to NBCR risks.
18See GAO, Catastrophic Risks: U.S. and European Approaches to Insure
Natural Catastrophe and Terrorism Risks, GAO-05-199 (Washington, D.C.:
Feb. 28, 2005) for a description of how insurers use modeling firms to
estimate the financial consequences of various natural catastrophe
scenarios.
19Insurance Information Institute, Terrorism Insurance and the United
States Government (New York, N.Y.: September 2004).
20See GAO-06-91 . We concluded that the assessments of selected federal
agencies were limited in terms of including information on the relative
probability of various threat scenarios. The assessments were limited in
their reliability and completeness in part because coordination was needed
with the intelligence community.
21American Academy of Actuaries, August 2, 2005, letter to the Honorable
Richard Baker, Chairman, Subcommittee on Capital Markets, Insurance and
Government Sponsored Enterprises, Committee on Financial Services, U.S.
House of Representatives.
22See appendix I for a description of the insurance experts, insurers, and
reinsurers we selected to interview.
23From U.S. Department of the Treasury, "Report to Congress: Assessment:
The Terrorism Risk Insurance Act of 2002," (Washington, D.C.: Jun. 30,
2005). Treasury reported on the market for terrorism insurance in 2005,
using data collected in 2003 and 2004.
24According to Treasury, the overall amount of coverage for any of the
NBCR events was the same for 2003 and 2004, with an increase in the number
of large insurers reporting coverage for NBCR events. The nonresponse rate
for this part of the study was 16 percent in 2003 and 9 percent in 2004.
Percentages given do not include workers' compensation coverage.
25Specialty insurers, also called surplus lines insurers, are not licensed
or admitted to generally conduct business in a state but nevertheless are
allowed to write insurance in a state under certain circumstances, such as
providing insurance for special risks or with terms and conditions having
special flexibility.
26According to the American Academy of Actuaries, losses for a large NBCR
event in both commercial property/casualty and workers' compensation could
be substantial. Loss estimates obtained by the Academy indicate that a
large NBCR event in a densely populated area could cause total insured
losses of $158.3 billion for commercial property, $14.4 billion for
general liability, and $483.7 billion for workers' compensation. American
Academy of Actuaries, April 21, 2006, letter to the President's Working
Group on Financial Markets; public comment record, U.S. Department of the
Treasury.
27Representatives of the insurers we interviewed said that although TRIA
would cover a portion of their losses, the percentage mandated by law for
insurer payments represented a sizeable portion of their capital. Under
TRIA, insurers affected by a certified terrorist event would currently pay
a deductible of 17.5 percent of earned premium in addition to paying 10
percent of the insured losses exceeding the deductible. This is an
increase from the deductible amounts in previous years (7 percent in 2003,
10 percent in 2004, and 15 percent in 2005), and less than the 20 percent
deductible that they would be responsible for paying in 2007. Treasury
also noted the impact of company-specific deductibles in its 2005 report,
stating that the deductible may confer an advantage to smaller insurers
and insurers writing in single TRIA-eligible lines. Moreover, insurers
will be responsible for covering 15 percent of the insured losses
exceeding the deductible in 2007. See 15 U.S.C. S: 6701 note (Pub. L. No.
107-297, S:S: 102(7) and 103(e)(1)(A)). As a business strategy, insurers
we interviewed had decided to limit their exposure by limiting the amount
of business they wrote for NBCR risks.
28Litigation remains a concern to representatives of a property/casualty
insurer and reinsurer we interviewed because of what has occurred with
other terrorist acts. To illustrate, property/casualty insurers were
involved in lawsuits related to the 1993 bombing of the World Trade Center
as late as November 2005.
29Standard Insurance Services Office (ISO) policy contracts state that
insurers will not pay for any loss or damage from "nuclear reaction or
radiation, or radioactive contamination, however caused." ISO is a
national rating organization for the property/casualty insurance industry
that develops standardized policy language designed to be in compliance
with regulatory requirements. According to an NAIC representative,
regulators have allowed commercial property/casualty insurers to exclude
nuclear risks because insurance coverage for nuclear events falls under
the Price-Anderson Act, Pub. L. No. 85-256, 71 Stat. 576 (Sept. 2, 1957),
codified at 42 U.S.C. S:S: 2039, 2210.
30After September 11 and prior to the passage of TRIA, ISO created
terrorism exclusions with specific references to the dispersal of nuclear
or radioactive material and the release of biological or chemical
materials. Under TRIA, commercial property/casualty insurers are required
to "make available" the same coverage as they did prior to September 11.
Because of this, insurance industry representatives told us that insurers
have relied on other long-standing exclusions written into standard
contracts to limit their exposure to NBCR events.
31As of June 28, 2006, according to NAIC, these states were California,
Georgia, Hawaii, Illinois, Iowa, Maine, Massachusetts, Missouri, New
Jersey, New York, North Carolina, Oregon, Pennsylvania, Washington, West
Virginia, and Wisconsin. According to NAIC, since September 11, insurers
have tried to limit fire following exposure by lobbying state legislatures
to amend standard fire laws so that insurers would not be responsible for
fire losses resulting from terrorism. Based upon the information NAIC
provided, the number of states that have made such amendments has
increased from the last time we reported on terrorism insurance, from
seven states in 2004 to 12 in 2006. (See GAO-04-307.) The remaining 22
states and the District of Columbia, according to NAIC, did not have
standard fire policies.
32GAO has ongoing work in this area.
33CBO, Federal Terrorism Reinsurance: An Update (Washington, D.C.: January
2005).
34As described in GAO, Capital Hill Anthrax Incident: EPA's Cleanup Was
Successful: Opportunities Exist to Enhance Contract Oversight, GAO-03-686
(Washington, D.C.: Jun. 4, 2003), letters containing a powdered form of
anthrax were mailed to members of the news media and congressional
leaders, resulting in five deaths and a costly decontamination process.
35Treasury reports that 20 percent or fewer policyholders responded to its
survey. In addition, Treasury only surveyed policyholders about purchasing
NBCR coverage for commercial property/casualty lines.
36The information on demand for terrorism coverage comes from the 2006
Marsh MarketWatch report, published by a large commercial insurance broker
using data from more than 2,000 companies, representing two-thirds of
their clients.
37Captives are special-purpose insurance companies set up by commercial
businesses to self-insure risks arising from the owners' business
activities. Captives may be insurers under TRIA and therefore may be
eligible for payments for losses related to certified NBCR events.
38The guidance NAIC issued, termed a "model bulletin," also stated they
did not believe terrorism exclusions were needed in personal
property/casualty insurance (including homeowners' insurance policies).
See NAIC Model Bulletin (Dec. 21, 2001) addressing exclusions related to
acts of terrorism, personal lines property/casualty coverage, life
insurance, health insurance, and workers' compensation.
39American Academy of Actuaries, Public Policy Monograph, P/C Terrorism
Insurance Coverage: Where Do We Go Post-Terrorism Risk Insurance Act?
(Washington, D.C.: May 2004). In addition, Pennsylvania is an exception to
this general rule because that state allows insurers to exclude losses
from disability or death resulting from military activities or enemy
sabotage. See 77 P.S. S: 1209 and 77 P.S. S: 431.
40NCCI helps insurers develop and file loss costs and rates in 33 states
and the District of Columbia.
41NCCI developed the terrorism surcharge using information from a modeling
firm on potential losses to workers' compensation lines. The surcharge is
applicable to 36 states-2 more than the number of states where NCCI files
loss costs or rates. However, this surcharge was not developed for
non-NCCI states, a group which includes some states with localities
considered to be at higher risk for terrorism attacks-including
California, New York, and Texas.
42The Rating Board determines workers' compensation rates in New York.
43As we previously noted, insurers use historical information from a large
number of occurrences to determine potential future losses. In addition,
workers' compensation insurers that underwrite in California told us that
even if they could charge higher prices to specifically cover NBCR risks,
they could not use these funds to establish separate reserves to cover
potential losses until after an event had occurred.
44In addition, GAO has reported on difficulties in identifying whether
chemical agents were the source of long-term illness. See GAO, Gulf War
Illnesses: DOD's Conclusions about U.S. Troops' Exposure Cannot Be
Adequately Supported, GAO-04-159 (Washington, D.C.: Jun. 1, 2004).
45Workers' compensation insurance only would cover injury or illness that
occurred or was contracted on the job or when the employee was acting
within the scope of employment.
46In other words, workers' compensation insurers charge different rates,
depending on the risk of death or injury by occupation, but they must
charge the same statewide rate for occupation regardless of geographic
location. For example, workers' compensation insurers charge higher rates
for roofers than for clerical staff. However, according to NCCI
representatives, employers pay the same rate for a roofer in an area
considered at greater risk for a terrorism attack as they pay for a roofer
in an area considered less at risk.
47The New York State Insurance Fund and the State Compensation Insurance
Fund of California are both insurers of last resort for employers that
otherwise cannot find workers' compensation insurance in their respective
states. See appendix I for information about their market share
nationwide.
48Although neither NAIC nor the American Council of Life Insurers could
tell us about requirements across all states related to exclusions for
terrorism and NBCR risks, NAIC told us that many states allow life
insurers to exclude losses from an act of war. California state regulatory
officials told us that they did not include terrorism within the
definition of an act of war.
49California regulatory officials told us that not all life products are
subject to regulatory review, and therefore some forms sold by life
insurers in California could exclude NBCR risks.
50For example, according to one insurer, a group life insurer might
anticipate three or four deaths per 1,000 people through ordinary causes
of death, but an incident that caused more than four deaths per 1,000
would require additional funds beyond what the insurer anticipated.
51In general, when insurers become insolvent and cannot pay their claims,
state insolvency guarantee funds compensate members of the public who
suffer losses, although the policyholders may bear part of the losses
themselves.
52According to a model developed for the American Academy of Actuaries, a
large NBCR event could cause widespread casualties resulting in insured
losses to life insurers of $82 billion. See footnote 26.
53NAIC also does not track state requirements regarding the coverage of
NBCR events in health insurance policies across the states. California
regulatory officials told us that some health insurance forms could
exclude NBCR coverage if such a form were not disapproved by the state
within 30 days of filing.
54American Academy of Actuaries, December 2002, Public Policy Monograph,
Group and Health Coverage in the Wake of September 11. The Academy
specifically noted that a biological, chemical, or radiological attack
could spread illness for extended periods. In addition, we have noted that
the symptoms from some biological agents easily could be confused with
other, more common illnesses. See GAO/NSIAD-99-163 .
55Unlike workers' compensation insurance, health insurers with whom we
spoke told us that their policies covered medical treatments for current
illnesses or injuries, regardless of when the person got sick or hurt.
56The capabilities and availability of public health personnel and
medicines or vaccines could affect the scope of damage and casualties, as
we have previously noted in reports on the preparedness of public health
agencies and health care organizations for biological attacks. See GAO,
Infectious Disease Outbreaks: Bioterrorism Preparedness Efforts Have
Improved Public Health Response Capacity, but Gaps Remain, GAO-03-654T ,
(Washington, D.C.: Apr. 9, 2003) and GAO, Bioterrorism: Preparedness
Varied across State and Local Jurisdictions, GAO-03-373 (Washington, D.C.:
Apr. 7, 2003).
1Emmett J. Vaughan and Therese Vaughan, Fundamentals of Risk and
Insurance, 9th ed. (Hoboken, N.J.: John Wiley & Sons, 2003).
2From an insurance perspective, a catastrophe is one that has the
potential to cause severe losses to an insurance company relative to its
available financial resources.
Assessing Exposure to NBCR Risks
3Cat Modeling 2006: Shifting Paradigms, presented by the Reinsurance
Association of America, Tampa, Fla.: February 2006.
4The Insurance Information Institute provides information and analysis of
insurance topics and collects data on insurance premiums and market shares
for individual states as well as for the entire United States. Moody's
Investors Services, as part of its Special Comment on insurers' exposure
to terrorist risks, published information about workers' compensation
insurers' premiums and market share.
5All of the information about market share data came from the Insurance
Information Institute, with the exception of workers' compensation
insurance, which came from Moody's Special Comment on Terrorism Insurance
in 2005. While the state funds only underwrite workers' compensation in
their respective states, Moody's calculated their marketshare based on a
percentage of total premiums written nationwide.
6These studies were the Marsh MarketWatch Report: 2006 and Moody's Special
Comment Letter on Terrorism Insurance: 2005.
(250283)
www.gao.gov/cgi-bin/getrpt? GAO-06-1081 .
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Orice M. Williams (202) 512-5837 or
[email protected].
Highlights of GAO-06-1081 , a report to the Chairman, Committee on
Financial Services, House of Representatives
September 2006
TERRORISM INSURANCE
Measuring and Predicting Losses from Unconventional Weapons Is Difficult,
but Some Industry Exposure Exists
Terrorists using unconventional weapons, also known as nuclear,
biological, chemical, or radiological (NBCR) weapons, could cause
devastating losses. The Terrorism Risk Insurance Act (TRIA) of 2002, as
well as the extension passed in 2005, will cover losses from a certified
act of terrorism, irrespective of the weapon used, if those types of
losses are included in the coverage. Because of a lack of information
about the willingness of insurers to cover NBCR risks and uncertainties
about the extent to which these risks can be and are being insured by
private insurers across various lines of insurance, GAO was asked to study
these issues. This report discusses (1) commonly accepted principles of
insurability and whether NBCR risks are measurable and predictable, and
(2) whether private insurers currently are exposed to NBCR risks and the
challenges they face in pricing such risks. GAO collected information from
and met with some of the largest insurers in each line of insurance,
associations representing a broader cross section of the industry and
state insurance regulators.
GAO makes no recommendations in this report.
Insuring NBCR risks is distinctly different from insuring other risks
because of the potential for catastrophic losses, a lack of understanding
or knowledge about the long-term consequences, and a lack of historical
experience with NBCR attacks in the United States. Measuring and
predicting NBCR risks present distinct challenges to insurers because the
characteristics of the risks largely diverge from commonly accepted
principles used in determining insurability. According to these common
principles, when assessing insurability, the risk generally must (1) have
past occurrences sufficient in number and homogeneous enough (invoking the
"law of large numbers") to enable insurers to accurately predict future
losses, (2) be definite and measurable in terms of dollar value, (3) occur
by chance, and (4) not result in catastrophic losses for the insurer.
While the condition of insurability or uninsurability is not an absolute,
NBCR risks generally fail to meet most or all of these principles of an
insurable risk. Indeed, insurance experts GAO interviewed said that the
potential severity of NBCR risks alone could diminish the willingness of
some insurers to insure NBCR risks.
Although NBCR risks may not fully satisfy the principles of insurability,
there are enough variations in exposure across lines of insurance that
some insurers or some lines of insurance may have no willingness to offer
coverage for NBCR, while others may choose to offer coverage for some or
all of the risks. For example, even with TRIA, property/casualty insurers
generally have attempted to limit their exposure to NBCR risks by
excluding nearly all NBCR events from coverage, both for commercial
property/casualty and homeowners. According to industry representatives,
property/casualty insurers believe they have excluded NBCR coverage by
interpreting existing exclusions in their policies to apply to NBCR risks,
but some of the exclusions could be challenged in courts. Unlike
property/casualty insurers, however, workers' compensation, life, and
health insurers are exposed to NBCR risks and generally have not excluded
them from coverage for a variety of reasons. Specifically, workers'
compensation insurers generally offer NBCR coverage because many states
limit the exclusion of perils for workers' compensation. Conversely, while
life and health insurers may not always be required to insure NBCR risks,
they generally face other challenges in segregating and excluding NBCR
risks. However, representatives of workers' compensation, life, and health
insurers expressed concerns that the prices they currently charge may not
cover their potential exposures to NBCR risks, sometimes because of
regulatory limitations, and generally because of difficulties in measuring
and pricing for NBCR losses. Given the challenges faced by insurers in
providing coverage for, and pricing, NBCR risks, any purely market-driven
expansion of coverage is highly unlikely in the foreseeable future.
*** End of document. ***