Instead, questions need to be answered over the type of risk being written and if a private risk is to be underwritten differently from a public one, Ms. Vaughan noted during a panel discussion here on “Responding to Terrorism, the P-C Landscape in the Wake of 9/11,” at the 80th annual convention of the Downers Grove, Ill.-based Alliance of American Insurers.

Ms. Vaughan, who is also Iowas insurance commissioner, questioned how insurers will define a “trophy” property in underwriting terms, and how that would be priced.

“I dont think terrorism can be underwritten,” said Alice D. Schroeder, managing director with Morgan Stanley in New York. Unlike a natural disaster, which insurers are experienced in assessing for predictability given historical and scientific data, terrorism cannot be geographically zoned for the purpose of underwriting, she noted. “The purpose of terrorism is to provoke fear, and to do this in a predictable manner does not provoke fear,” she said.

When it comes to modeling for terrorism, there might be considerable doubt about the reliability of the process, said John Andre, vice president for A.M. Best in Oldwick, N.J. “A model is only as good as the information put into it,” he observed. “It is easy to sell, but performance is another question.”

“The insurance industry has huge experience in modeling natural disasters, and insurance can be reasonably priced,” agreed Mark Puccia, managing director at Standard & Poor's in New York. “Terrorism does not work that way, and the insurance industry is struggling with it.”

Today, some terrorism coverage is available, but it is very expensive and most clients are doing without, according to Ken Crerar, president of the Washington-based Council of Insurance Agents and Brokers. To fulfill the requirements of their financiers, contractors and others are buying a minimal amount of insurance, “but not really enough to cover them,” he added.

While the need for Congress to develop some form of reinsurance backstop cannot be emphasized enough, Mr. Crerar struck an optimistic note, saying the “insurance industry has done the impossible often, and I believe they can come up with something.”

Tort reform provisions stalled action in the U.S. Senate over a bill to provide a federal backstop for terrorism insurance, but this issue is too important to be bogged down by such subsidiary considerations, according to Alliance President Rodger Lawson.

In an interview here with National Underwriter, Mr. Lawson emphasized that while he understands the Republican party's desire for tort reforms, he said he wished they had picked some other legislative vehicle. Because of the overriding need to get a terrorism reinsurance program in place quickly, he said Congress should “park [tort reform] on the side” and take it up as a separate agenda at a different time.

He said lawmakers are coming to understand the importance of terrorism reinsurance in relation to the economic dynamics of the country, adding that he is becoming increasingly hopeful Congress will come up with a solution.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, May 6, 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.