Industry Issues | Terrorism Insurance | U.S. Terrorist Activity

Industry Issues | Terrorism Insurance

Consumers Benefit from a Market-Based Approach to Terrorism Insurance

A long-term problem requires a long-term solution
  • The exposure to heightened terrorism risk is a long-term problem that deserves a long-term solution. Recent attacks in London, stray Cessnas over Washington D.C., and consistent reports from the Department of Homeland Security and other government agencies about the vulnerability of our food and water supply, our transportation system, and our energy producing capabilities are hard evidence that the problem of terrorism will not disappear in the near future.
  • A market-based approach provides the most stability and gives both buyers and sellers a stable framework within which to plan and to manage their risk over the long-term.
Innovation benefits consumers, but requires time and stability
  • Given all the uncertainties still existing in this market, a short-term approach requires insurers to begin thinking immediately about "what happens in two years." If the past is any guide, we'll see insurers needing to launch efforts just six months into the extension to reauthorize conditional exclusions, to be effective when the extended TRIA expires. That kind of uncertainty is simply not good for insurance buyers or the economy.
The Federal government is the only entity large enough to provide certainty and stability
  • Only the federal government can provide the ultimate stability and financial capacity necessary to create a functional market for this complex and unpredictable risk.
  • Without a federal role, consumers can have no assurance that their claims will be paid in the event of a major, terrorism-related loss. The potential exposure is too large for the private market to handle.
A robust private market benefits consumers
  • Consumers have their greatest protection when private markets can develop innovative responses to risk. In a robust private market, sellers will offer many possible solutions to solve a problem and consumers will be better served by the competition between vendors. This can only happen when insurers have the freedom to vary and tailor the terms and conditions of the products they offer.
  • Consumers benefit when those with the greatest risk have strong incentives to reduce their risk. While there are significant limitations on how much consumers can really know or do about their own terrorism risk, to the extent price and the availability of insurance coverage can create incentives for managing that risk, all consumers will benefit.
  • When sellers know they can count on market freedom, they will be much more willing to enter a market and develop potentially successful new solutions. Without market freedom, they will not and consumers will be left to depend on nothing more than a series of government extensions of backstops.
Allowing companies to spread the risk through multiple facilities will keep costs down
  • Congressional leaders have sent a clear message that the government's involvement in bearing terrorism risk will be reduced. In that case, there are only two possible places the additional risk can be borne - either by capital providers willing to assume some risk (in exchange for a risk premium) or by the consumers themselves. Consumers are helped by the creation of any facility that can help capital providers bear a portion of this risk. Without such vehicles, the risk will have to be borne by consumers themselves.
  • A single facility will not be able to bear all the additional risk alone. However, to the extent any portion of the additional risk can be carried by private insurers using such a facility, it will reduce the amount consumers have to bear.
The development of a terrorism catastrophe bond market could benefit consumers by creating additional capacity
  • It's important to encourage the development of tools that can bring non-insurance sources of capital into the terrorism insurance market. There simply is not enough financial capacity in the insurance industry to solve the problem we face.
  • Catastrophe bonds may also be particularly attractive to reinsurers and may encourage them to offer more reinsurance protection to the primary insurance market. That capacity will, in turn, make more capacity for coverage available directly to consumers.