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Terrorist attacks may change the face of insurance forever

When terrorists struck the U.S. on September 11, 2001, the damage went beyond the immediate wreckage. As people started to assess the damage, they were left with many questions about the loss of their loved ones and the destruction of their property.

According to Robert P. Hartwig, PhD, CPCU, Senior Vice President and Chief Economist of the Insurance Information Institute, "The terrorist attacks of September 11, 2001 produced insured losses larger than any natural or man-made event in history. Total life and non-life insurance losses for the World Trade Center, Pentagon and Pennsylvania events are estimated to be $40.2 billion."

The tragedy will send shockwaves through the entire insurance industry.

"The losses sustained by the insurance industry were unprecedented in virtually every respect, producing catastrophic losses not only in property coverages, but also for the first time in life insurance, disability and workers compensation lines. Aviation and liability insurers also suffered their worst-ever losses stemming from a single event."

"The sheer enormity of the loss - coming from an entirely unforeseen peril for which no premium had been collected - combined with the possibility of future attacks and uncertainty arising from the U.S.'s rapid military response to the threat produced financial shockwaves that shook insurance markets worldwide and provoked an extraordinarily swift and severe underwriting and pricing reaction by insurers and reinsurers."

Backstop Legislation

The President signed the Terrorism Risk Insurance Act legislation on November 26, 2002. This legislation provides for private insurers and the federal government to share the future losses from terrorism for a three-year period.

With the President's signature, all state exclusions for terrorism are excluded. Insurers must notify existing policyholders about the federal backstop, offer comparable terrorism coverage, and specify the cost of the coverage.

Policyholders have the option to accept or decline the coverage, or negotiate other terms. These provisions apply to new policies written after enactment.

According to the Insurance Information Institute, key benefits of the legislation include:

  • Much needed capacity is brought back to the market at a critical time.
  • While still large, the potential risk to individual insurance companies can be quantified and enables the market to function again.
  • Reinsurers, who sustained over half of the losses, are supported by the backstop the government provides. Otherwise, they could not assume the same amount of terrorism risk as they did on September 11, 2001.
  • Current market conditions cannot change overnight, so there is now time for insurers to make decisions about the nature and amount of risk they want to insure in the future.
  • Many small- and mid-sized businesses across the country will experience little change. Their premiums are rising for other reasons, but the terrorism coverage itself will not add much to their insurance costs.
  • The major problem remains the threat of chemical, biological, nuclear and radiological attacks on high profile structures or businesses with large concentrations of employees. The legislation helps make coverage available, but at least initially it will be very expensive.

Major Features of the Legislation

  • This legislation does not reestablish the status quo that existed before September 11, 2001. There has been a fundamental change in the nature of risk in our society, the risk of future attacks is real, and the stopgap legislation will allow time for the markets to adjust to this new reality.
  • An event has to cause $5 million in losses to be certified as an act of terrorism.
  • Each participating insurance company will be responsible for paying out a certain amount in claims — a deductible — before federal assistance becomes available. This deductible is based on a percentage of direct earned premiums from calendar year 2002.
  • For losses above a company's deductible, the federal government will cover 90%, while the company contributes 10%.
  • Even with federal support, the insurance industry's share of the risk is substantial.
  • Recouping excess losses will be accomplished through a surcharge on all policyholders. The surcharge cannot be more than 3% of the premium paid for a policy in a given year.
  • Losses covered will be capped at $100 billion. Above this amount, Congress is to determine the procedures for and the source of any payments.


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