Terrorism Insurance in the Post September 11 Marketplace

Publication Date: December 2001

Publisher: Library of Congress. Congressional Research Service

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Research Area: Business

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Abstract:

The insured losses from the terrorist attacks of September 11 are currently estimated to total as much as $70 billion, the largest insured catastrophic loss in history. Although the insurance industry has committed, and appears able, to pay losses resulting from the attacks, it has also warned that it would not be able to absorb such major losses from terrorism in the future. The problem lies with the reinsurance industry ­ through which primary insurers can "lay off" or spread large risks. Reinsurers are saying that due to their inability to quantify, underwrite, or price for the escalation of terrorism risks, they will not accept them in future reinsurance contracts. Without this backup reinsurance capacity, primary insurers maintain that they have no choice but to specifically exclude terrorist coverage in all of their future commercial insurance policies. There is a contention, however, over the terms of any federal assistance. The problem is coming to a head quickly: reinsurance contracts on commercial risks are generally written on a one year basis, and 70% of those currently in existence will expire on January 1, 2002. The lack of terrorism coverage after that date could impede the ability of financial services providers to finance commercial property acquisitions and new construction projects.

As a result, Congress is considering a temporary government-industry risk sharing program until the private marketplace can adapt to provide the needed coverage. There are multiple approaches to the issue. One approach is to do nothing and wait to see how the market adapts. This report discusses possible implications for markets and the current insurance regulatory structure in the absence of any Congressional action, and will be updated as events warrant.