As a risk management consulting firm, we often find ourselves on the opposite side of the fence when dealing with insurers. However, in the case of coverage for terrorism, we and many of our clients (who are real estate lenders), feel that Congress should quickly pass meaningful legislation.

When it comes to rating fire insurance, the industry has 150 years of experience to rely upon to develop meaningful rates. The last few decades have provided some statistical validity in rating various types of general liability exposures. When it comes to terrorism, however, one might liken the experience to a single cycle on an EKG. There are a number of small blips followed by a sharp upturn and then small blips again.

In the hard insurance market we are experiencing (even pre-9/11), I would think that most insurers would welcome the opportunity to add a new line of coverage to their portfolio, especially if there were some assurance of at least intermediate-term profitability. Yet with all the rush of capital pouring into new reinsurance entities offshore, not one of them has stepped forth with a willingness to write terrorism coverage.

We recently came across a quote covering an office building worth $100 million, where the limit offered was $25 million, the deductible was $5 million, there was no coverage for rental income, and the premium was $2.5 million!

As consultants to 16 major lenders, having assisted in over $50 billion of acquisition and construction loans in the past 11 years, we have seen this activity grind to a halt in the past few months. Lenders just do not want to expose themselves on non-recourse loans where the borrower has no coverage for terrorist acts. Turning the faucet off has already started to impact the construction industry, where even bridge financing is no longer available.

The U.S. General Accounting Office, in its recent testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs, has properly cited selected insurance programs established by federal statute, such as:

The Price-Anderson Act of 1957, providing coverage for catastrophic nuclear accidents.

The Overseas Private Investment Corp., formed in 1971, providing insurance against overseas political risk.

The National Insurance Development Program, authorized in 1968, providing insurance against urban riots and civil disorder.

The National Flood Insurance Program, also in 1968, providing coverage in critical flood plains.

Other nations have also initiated government-sponsored insurance programs covering terrorist acts (the United Kingdom, Israel), earthquake (Japan), and selected catastrophic events (Switzerland).

This is not a question of the free market as these forces cannot operate without hard data. If the Bush Administration and both Houses of Congress are truly concerned about economic stimulus, they will hasten to neutralize the dampening effects of the current terrorism exposure.

Herbert H. Feldman

President & CEO

Alpha Risk Management, Inc.

Great Neck, N.Y.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 25, 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.

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