Terrorism Insurance

Many of the concepts presented thus far in the website come into focus by examining the insurance market's reaction to the September 11, 2001 terrorist attacks on the World Trade Center in New York and the Pentagon in Washington D.C. These attacks produced the most insured damage in history, with current estimates of the insurance claims ranging from $40 to $60 billion.

Until the last claim is settled, the final cost of the September 11 attacks to insurers, and the U.S. economy, will not be known. The author found the following estimates in the news media, and whether they prove exact, they do provide a sense of the scope of the insurance claims.

1. Aviation liability claims arose from deaths, injuries, and property damage suffered because of claimed negligence of airlines, airports, security services, and others in not providing adequate security. (Loss estimate, $4 $10 billion.)

2. Aviation hull claims arose from the loss to the aircraft involved in the attacks. (Loss estimate, $500 million.)

3. Life insurance claims arose from about 3,000 people killed in the attacks. Insurers paid claims for both group and individually purchased policies. (Loss estimate, $3 billion.)

4. Property insurance claims arose from the destruction of the World Trade Center towers, other buildings, and other property including automobiles. (Loss estimate, $9 $12 billion.)

5. Workers' compensation claims arose from the thousands of employees killed or injured while at work. Survivors of deceased workers are entitled to benefits, and injured workers are compensated for lost earnings and medical expenses. (Loss estimate. $4 billion.)

6. Business interruption claims arose from the lost profits and extra and continuing expenses of businesses that were forced to close, relocate, or were unable to operate in a normal manner after the attacks. (Loss estimate, $10 $12 billion.)

7. Event cancellation claims arose from businesses in New York City and elsewhere that did not proceed with scheduled events because of the attacks. (Loss estimate, $1 billion.)

The September 11 attacks also produced billions of dollars in uninsured losses, including the cleanup costs in New York, the damage to the Pentagon, and the uninsured business interruption losses suffered by the tourism industry throughout the world. Moreover, the cost of increased security to prevent or mitigate the cost of future attacks, and the cost reflected in the economy in general and the stock market in particular are real and must be added into the final estimate to the total damage caused by the terrorists.

As a result of the terrorism of September 2001, President Bush signed the Terrorism Risk Insurance Act of 2002 on November 26, 2002. The main features of the Act are the following:

1. The federal government, within the Department of the Treasury, will share losses from future terrorist attacks with the insurance industry.

2. The Act is triggered when the Secretary of the Treasury certifies an event as an act of terrorism.

3. The Act requires mandatory participation by property and casualty insurers who must offer terrorism insurance to all policyholders.

4. The Act ends on December 31,2005.

5. Participating insurance companies pay the first dollars of losses before federal assistance is available. Each insurer's responsibility is based on the premiums that insurer collected in the previous year. In the first year, the insurers are responsible for an amount equal to 7 percent of premiums collected, 10 percent in the second year, and 15 percent in the third year.

6. When insurers' losses exceed their responsibility, the federal government pays for 90 percent of the excess insured losses. Insurers pay the additional 10 percent. The government's loss potential is limited to $100 billion.

7. The Act allows insurers to charge a premium for terrorism coverage and they must disclose the charge clearly and conspicuously.

In conclusion, this section of the chapter demonstrates that the September 11 attacks transformed the peril of terrorism from a privately insured event to an event insurable only with federal government participation. Readers can see that terrorism is not an ideal loss exposure, because the frequency and severity of claims are not (and were not) predictable, and loss potential appears catastrophic. )