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

Industry Issues | Terrorism Insurance

APCI Policy Position

National Security and Economic Security are Inextricably Linked
  • There is no question that America's economic security and national security are inextricably linked. Economists and the Administration agree that a terrorist attack is one of the greatest threats facing the U.S. economy.
  • It is also clear that there is no "perfect" solution to this complex problem. Addressing it will require a mix of policy options. Any solution designed by Congress - either another short-term extension of a modified TRIA program or a longer-term approach that replaces TRIA - will work, provided that there are no future attacks.
  • It is impossible for anyone - insurers or government agencies - to predict the size, location, or frequency of terrorist attacks. This uncertainty makes terrorism an uninsurable risk that threatens both the solvency of the insurance industry and the stability of the U.S. economy.
  • That point was driven home by former Federal Reserve Board Chairman Alan Greenspan, who said, "There is no way you can expect the private insurance system to handle terrorism risks. I don't see how we can avoid the issue of a significant segment of government-backed reinsurance in this particular area."
  • That does not mean that the federal government or taxpayers should bear all the risks. Far from it. We support a market-based solution to the problem that would utilize market forces to transfer an even greater percentage of the risk to the private market.
  • However, we have to balance a realistic view of the capacity and capability of private markets with an honest assessment of terrorism risks. Terrorism risk models indicate that a loss of $100 billion or more is not far-fetched. This would easily exceed the financial capacity of the industry.
  • Insurers recognize and respect the power of free markets, and we have no doubt that with reasonable and responsible incentives, with time to adjust, and with a stable framework for public and private roles that private markets will be able to accept more terrorism risk. But we also must acknowledge that continued federal participation will be required to make such a program work.
Goals of a Market-Based Program: Protecting Our Economy and Stimulating the Private Sector
  • Congressional leaders have clearly indicated to us that they intend to reduce over time the federal government's involvement in this risk. They have also insisted that there must be more private market involvement in solving this problem. The challenge facing Congress and the industry is to develop a program that meets three fundamental objectives:

    1. To protect our economy against the risk of terrorist attack;
    2. To promote the development of robust private markets to assume more of this risk over time; and
    3. To reduce taxpayer exposure to this risk over time.
  • Terrorism is a national economic security problem. It requires a long-term, national response, which includes a federal role. APCI supports a market-based approach to terrorism insurance that removes regulatory obstacles and allows market-forces to develop innovative methods of financing terrorism risk exposure through the use of pooling arrangements, catastrophe bonds, and other mechanisms. While the APCI approach would shift a greater share of the risk to the private sector, it would also maintain the high level of federal participation needed to foster a functional market for terrorism. For more details on the APCI proposal, see "The Key Elements of a Market-Based Approach to Terrorism Insurance."
The Value of a Long-Term Approach
  • One of the major advantages to a long-term approach is that unlike ongoing efforts to prevent and mitigate the damage from future attacks - efforts that require the consistent oversight of Congress, the intelligence community, the military, and the Department of Homeland Security - Congress will not have to continually revisit this issue. This will provide the insurance industry and business community with the certainty of financial security, fostering job creation and economic growth.
  • Some suggest that another short-term extension may be easier to enact and would provide more time to study and consider this issue. In this view, a short-term extension might be seen as a "bridge" to a better long-term program and allow additional time for study and reflection. These are the "pros" of a short-term extension.
  • However, another short-term solution will leave the economy facing all the same uncertainties it faces today about the future of terrorism risk and will impede the rational development of a robust private market response. A short-term approach will also require Congress to take up this issue again in a very short time, as soon as we enter the final year of whatever short period is enacted. We don't think that's wise.
The Economic Consequences Are Very Real
  • Commercial insurance consumers will begin receiving their 2008 policy renewal notices at the end of this year. Some consumers may find terrorism insurance prohibitively expensive, while others may not be able to secure coverage at any price.
  • Simply eliminating federal participation in the terrorism insurance equation will do significant and long-lasting harm to our economy. Without such coverage in place, businesses will be less likely to embark on new ventures, curtailing job growth, tax revenue, and economic expansion.
  • Insurance is a "foundation industry." Without it, buildings don't get built, jobs aren't created, stores can't open, and capital will be stagnant. Every day we delay action adds more uncertainty for both insurers and insurance buyers. There is an economic consequence to this sense of uncertainty.