Most Commercial Property/Casualty Insurers and Reinsurers We Contacted Exclude or Limit Coverage for NBCR Risks, While Workers’ Compensation, Life, and Health Insurers Generally Are Required to Offer Such Coverage

Commercial property/casualty insurers and reinsurers generally seek to  exclude coverage for NBCR risks or place significant restrictions on such  coverage. NBCR Coverage Generally Is Unavailable in Commercial Property/Casualty Insurance and Reinsurance Policies, but the Exclusions Used to Limit Coverage Could Be Challenged in Court

While few market surveys that we identified specifically have addressed  the availability of property/casualty insurance for terrorist attacks  involving NBCR materials, our interviews with a range of industry  participants suggests that such coverage continues to be limited. Similarly, we were told that group life insurers generally do not exclude  NBCR coverage from their policies, according to regulators and industry  participants. Potential Financial Consequences of NBCR Attacks Limit Property/Casualty Insurers’ Willingness to Offer Coverage; Insurers for Other Lines of Insurance Report Limited Capacity to Manage Associated Risks

Commercial property/casualty insurers and reinsurers generally are not  willing to provide coverage for NBCR attacks or place significant  restrictions on the coverage they offer because of the uncertainties  surrounding such attacks and their potential for generating catastrophic  losses. Life and  health insurers may also face challenges in managing NBCR risks, such as  competitive market pressures and challenges in establishing appropriate  premiums for their potential exposures. Because insurers and reinsurers face challenges in reliably estimating the  severity and frequency of terrorist attacks involving NBCR materials and  setting appropriate premiums, industry representatives reported that their  companies focus on the most catastrophic attacks under scenarios with  widespread financial losses. For example, an  early version of the bill to reauthorize TRIA in 2007 would have required  insurers to make NBCR coverage available and would have lowered their  exposure to potential losses. Proposal 1: Amend TRIA to Require Insurers to Make NBCR Coverage Available with the Federal Government Assuming Greater Financial Responsibility for Potential Losses

The House of Representatives initially passed an early version of the 2007  reauthorization of TRIA that would have amended the act to (1) require  insurers to make NBCR coverage available to policyholders, and   (2) require the federal government to assume a relatively high proportion  of the associated financial risk. For example, a representative from one insurer said that  unless mandated to do so, insurers would not offer coverage for NBCR  risks. Some industry participants expressed particular concern about the impact  that such a proposal would have on smaller insurers. Consequently, some industry participants said  that insurers, faced with a mandate of providing NBCR coverage, might set  premiums at rates they consider necessary to compensate for the risks of a  catastrophic attack, which could deter many commercial entities from  purchasing such coverage. Furthermore, although the RAND study concluded that costs  to the federal government could be reduced by requiring insurers to offer  NBCR coverage, the study noted that in the case of extremely large NBCR  attacks, the federal government’s financial liability could be larger than if  it did not participate in the market for terrorism insurance and require  insurers to offer NBCR coverage. In their oral comments, Treasury  officials said that they found the report informative and useful. NAIC provided written comments on a draft of this report, which have  been reprinted in appendix II. However, NAIC reported a  philosophical difference of opinion with comments in the draft report  about the ability of workers’ compensation insurers to charge risk-based  premiums for attacks involving NBCR weapons. However, the draft report in no way  meant to imply that state insurance regulators succumb to voter and  legislative pressures in approving rates, and simply reported that workers’  compensation insurers and some regulators we contacted for both our  September 2006 report and this report said that they did not believe the  permissible surcharges would be sufficient to cover the potential losses  associated with an NBCR attack. Appendix I: Objectives, Scope, and Methodology

Our objectives were to review (1) the extent to which insurers and  reinsurers offer coverage for nuclear, biological, chemical, and  radiological (NBCR) attacks; (2) the factors that contribute to the  willingness of insurers and reinsurers to provide coverage for NBCR  attacks and their ability to manage these risks; and (3) any public policy  options for expanding coverage for these risks, given current insurance  market conditions. We also reviewed the Department of the Treasury’s 2005 Report to  Congress, Assessment: The Terrorism Risk Insurance Act of 2002 and its  results from a survey of commercial property/casualty insurers on the  coverage they offered for NBCR risks.
Why GAO Did This Study

The Terrorism Risk Insurance Act of 2002 (TRIA) is credited with stabilizing insurance markets after the September 11, 2001, attacks by requiring insurers to offer terrorism coverage to commercial property owners (property/casualty insurance), and specifying that the federal government is liable for a large share of related losses. While TRIA covers attacks involving conventional weapons, insurers may use exceptions that may exclude coverage for attacks with nuclear, biological, chemical, or radiological (NBCR) weapons, which has raised concerns about the potential economic consequences of such attacks. TRIA's 2007 reauthorization directed GAO to review (1) the extent to which insurers offer NBCR coverage, (2) factors that contribute to the willingness of insurers to provide NBCR coverage, and (3) policy options for expanding coverage for NBCR risks. To do this work, GAO reviewed studies and reports and interviewed more than 100 industry participants about the availability of NBCR coverage in the market. GAO provided a draft of this report to the Department of the Treasury and the National Association of Insurance Commissioners (NAIC). Treasury and NAIC said that they found the report informative and useful. NAIC did express what it said was a philosophical difference of opinion with GAO's characterization of risk-based premiums for workers' compensation insurers.

What GAO Found

Consistent with the findings of a September 2006 GAO report on the market for NBCR terrorism insurance, property/casualty insurers still generally seek to exclude such coverage from their commercial policies. In doing so, insurers rely on long-standing standard exclusions for nuclear and pollution risks, although such exclusions may be subject to challenges in court because they were not specifically drafted to address terrorist attacks. Commercial property/casualty policyholders, including companies that own high-value properties in large cities, generally reported that they could not obtain NBCR coverage. Unlike commercial property/casualty insurers, insurers in workers' compensation, group life, and health lines reported generally providing NBCR coverage because states generally do not allow them to exclude these risks. Commercial property/casualty insurers generally remain unwilling to offer NBCR coverage because of uncertainties about the risk and the potential for catastrophic losses, according to industry participants. Insurers face challenges in reliably estimating the severity and frequency of NBCR attacks for several reasons, including accounting for the multitude of weapons and locations that could be involved (ranging from an anthrax attack on a single building to a nuclear explosion in a populated area) and the difficulty or perhaps impossibility of predicting terrorists' intentions. Without the capacity to reliably estimate the severity and frequency of NBCR attacks, which would be necessary to set appropriate premiums, insurers focus on determining worst-case scenarios (which with NBCR weapons can result in losses that would render insurers insolvent). For example, a nuclear detonation could destroy many insured properties throughout an entire metropolitan area. Workers' compensation, group life, and health insurers that generally cannot exclude NBCR coverage from their policies also face challenges in managing these risks. For example, workers' compensation insurers said they face challenges in setting premiums that they believe would cover the potential losses associated with an attack involving NBCR weapons. GAO reviewed two proposals that have been made to address the lack of NBCR coverage in the commercial property/casualty market. The first proposal, part of an early version of the bill to reauthorize TRIA in 2007, would have required insurers to offer NBCR coverage, with the federal government assuming a greater share of potential losses than it would for conventional attacks. Some industry participants supported this proposal because insurers otherwise would not offer NBCR coverage and because a substantial federal backstop was necessary to mitigate the associated risks. However, others said that some insurers might withdraw from the market if mandated to offer NBCR coverage, even with a substantial federal backstop. In a second proposal by some industry participants, the federal government would assume all potential NBCR risks through a separate insurance program and charge premiums for doing so. However, critics said the government might face substantial losses on such an NBCR insurance program because it might not be able to determine or charge appropriate premiums.