From the editor

Risk & Insurance, April 1, 2002

Terrorism coverage--or, more accurately, the lack of terrorism coverage--has been a prime topic at recent property/casualty conferences, from New York to Bermuda. It's a thorny problem for insurers and reinsurers who would like to model the risk and price it accordingly, but who fear that post-9/11 terror is simply off the charts when it comes to the prevailing calculations, which are essentially pre-911 1.

Thus, the industry's ongoing call for some sort of federal backstop to terrorism coverage is about the only practical response it has mustered, but the U.S. Congress has stalled on that front. The conventional wisdom is that the insurance industry hasn't really made the case for a federal terror reinsurance program, given the industry's ability to absorb the World Trade Center losses, its surge of new capital, and its customers' tendency to adjust to new market realities.

Indeed, commercial reinsurers have the "luxury" of excluding terrorism coverage altogether, and they have, but primary insurers can't do so in every state, or in workers' comp policies. Skyrocketing premiums are only adding to the sense of crisis. The hope for federal action may get a boost from a recently released report by the General Accounting Office that begins to make a real case for a federal terror backstop. The report notes that as time goes on and primary insurers successfully exclude terrorism coverage, the losses will be left to businesses, their employees, lenders, suppliers, and customers. And because they can't spread such risks among themselves the way insurers do, significant economic effects--from bankruptcies to loan defaults--could result. In addition, a significant consequence of insurers withdrawing from the market would be the absence of a claims-processing mechanism that could effectively respond to attack victims, as it did after 9/11. Already, the GAO explains, large commercial deve lopers and businesses are feeling the pinch of no or minimal terror cover, and projects are being halted, putting more drag on a struggling economy. Isn't it time for Congress to do its part and craft a solution?

Matt Damsker Editor-in-Chief mdamsker@lrp.com