So where do we go from here?

In the short-term, the insurance industry is warning that without the exclusions, carriers might not be able to write coverage in certain areas, or could conceivably withdraw from one or both states altogether. That would make commercial insurance even scarcer and more expensive than it already is in this rapidly hardening market. There is no conspiracy at work here–it's simple supply-and-demand economics.

Perhaps New York and California regulators hope to call the industry's “bluff,” confident that insurers will not pull out of such huge and potentially lucrative states. We concede it is unlikely that many commercial carriers could afford to simply walk away from these two crucial markets.

However, while availability of terrorism coverage might not necessarily be an issue just because the two states refuse to approve the proposed exclusions, affordability certainly could be. Commercial clients–particularly those in high-risk properties or locations–could see huge premium increases from insurers desperate to make it worth their while to take on terrorism exposures.

Some will undoubtedly accuse the industry of gouging, but we would say that's the price that must be paid if insurers are asked to shoulder terrorism exposures on their own. The fact that reinsurers have already excluded terrorism from their policies leaves primary companies bare, thus undermining the industry's entire risk-spreading principle. Thus, if primary insurers are forced to write terrorism coverage if they want to stay in the market, they should at least be compensated for taking on the risk.

Long-term, should the worst happen and another catastrophic terrorist attack hits California or New York, those insurers exposed could be overwhelmed with losses and go insolvent.

Congress is ultimately responsible for this mess by failing to put in place a federal terrorism reinsurance program. Word has come down from Capitol Hill that Congress will probably not revisit the issue unless they hear pleas from voting constituents.

We therefore urge commercial buyers to call their representatives in Congress, confront them with the practical impact of their inaction, and push them to put a viable reinsurance backup plan in place before the insurance market is disrupted even further.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 21, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

Contact Webmaster